Carl Icahn, a star corporate raider brought down to earth

Decades ago, Carl Icahn gained a formative insight from reading the American novelist Theodore Dreiser. The billionaire investor was absorbed by two of Dreiser’s novels, The Financier and The Titan, which chronicle the rise of industrialist Frank Cowperwood.

In a decisive financial stand-off, Cowperwood’s adversaries plot to have a bank call in his large personal debts. But unbeknown to them, Cowperwood holds a large reserve of assets that “could be drawn on and hypothecated”. Were it to be deployed, Dreiser writes, “these men should see at last how powerful he was and how secure”. Cowperwood prevails and Icahn says he learnt an essential lesson: always have a “war chest” of cash.

The 87-year-old is famed for his decades spent orchestrating shareholder fights with companies including Texaco, Trans World Airlines, Apple and McDonald’s. These battles have reshaped US financial markets by changing how corporations are run, steering their management towards the interests of large stockholders like Icahn.

For nearly half a century, the mere mention of his name has struck terror in the hearts of corporate chieftains and moved markets. But much of Icahn’s power emanated from an obscure, thinly traded public vehicle called Icahn Enterprises that has largely gone unexamined.

This month, Icahn was besieged by a sceptic named Nathan Anderson who, in a report published by his firm Hindenburg Research, uncovered heavy debts the investor had taken against his Icahn Enterprises shares. The revelation has exposed a surprising vulnerability in one of the world’s wealthiest financiers. Icahn has vowed to “fight back”, but his plans to secure his empire remain mostly a mystery.

In recent years, Icahn made ever-larger bets against a fast-rising market to protect his investments from a future crash. Instead of building an emergency reserve, the trades have led to nearly $9bn in losses. When confronted with those losses last week, a circumspect Icahn admitted: “Maybe I made the mistake of not adhering to my own advice in recent years.”

The predicament has shocked many senior figures on Wall Street. “It’s one of those moments in a crisis where you go, ‘Holy shit, everything I thought about somebody was wrong,’” said the head of a large financial firm.

Bill Ackman, a billionaire investor whom Icahn tussled with in a legendary fight over the fate of a multilevel marketing company, offered the most brutal assessment. “Icahn’s favourite Wall Street saying [is]: ‘If you want a friend, get a dog,’” Ackman wrote on Twitter. “Over his storied career, Icahn has made many enemies. I don’t know that he has any real friends. He could use one here.”

Born to schoolteachers in 1936, Icahn was raised in the working-class New York neighbourhood of Far Rockaway, Queens. After graduating from a local public high school, he earned a philosophy degree from Princeton University and supported himself using poker winnings.

He briefly enrolled in medical school, but dropped out and joined the army before settling down as a stockbroker. In the late 1960s, a wealthy uncle bankrolled Icahn’s purchase of a seat on the New York Stock Exchange, where he became a specialist in “risk arbitrage”, bets on anticipated corporate mergers.

Icahn entered public consciousness in the 1980s when he won control of Trans World Airlines using financing from junk bond king Michael Milken. He ruthlessly sold TWA assets for cash, and battled unions, earning a reputation as a “corporate raider”. The episode helped inspire the character Gordon Gekko in the film Wall Street.

In recent years, Icahn, who divorced his first wife and married his assistant, Gail, has moved his firm from a skyscraper overlooking Manhattan’s Central Park to Miami. He has also worked more closely with his adult children, Brett and Michelle.

Brett helped identify successful bets on Apple and Netflix and has been named his father’s eventual successor. Michelle’s work at the Humane Society inspired Icahn to run an unsuccessful campaign against McDonald’s over its treatment of livestock.

The attack on Icahn comes as he continues to battle companies he deems poorly managed. On Thursday, he achieved a draw in a war against Illumina, a company that makes machines to sequence the human genome. Icahn accused Illumina’s management of striking reckless acquisitions and asked its stockholders to give his nominees three board seats. He was able to oust Illumina’s chair, but failed to win the two other seats, which would have helped him dethrone its chief executive. The result underscores his enduring influence. But he is in uncharted territory.

This week, Icahn Enterprises plunged by more than 30 per cent, adding to a drubbing that has cut the company’s value by more than half. It has cost Icahn billions and made the threat of a “margin call” from his lenders more immediate.

Whether he can prevail may well come down to the lesson he says he learnt from Dreiser’s Cowperwood decades ago. Icahn told the Financial Times last week he had billions sitting outside his public vehicle. If so, the “war chest” would give him one more hand to play.

antoine.gara@ft.com

Additional reporting by James Fontanella-Khan