The Early Years Of Billionaire Carl Icahn, His Mind And Philosophy
Carl Icahn is one of the richest men on Wall Street, with an estimated net worth of $20 billion. A master of hostile takeovers — a recent attempt to buy a large stake in Dell — Carl Icahn is loved by a few and hated by many. Many lawyers, investors, bankers, managers, etc, detest him. As one M&A chief put it: “Carl’s dream in life is to have the only fire truck in town. Then when your house is in flames, he can hold you up for every penny you have.”
Amassing $20 billion in net worth is no easy task. I wanted to read his a biography, King Icahn: The Biography of a Renegade Capitalist written by Mark Stevens, to find out more about who he is. Although the book was released in 1993 — missing out on the last 20 years of Carl Icahn — I am particularly interested in his early years. Who was Carl Icahn before he became so wealthy?
Growing up as a middle class nerd from Queens, Icahn was never interested in sports and related activities of his peers in school. His high-school didn’t normally send kids to Ivy league colleges, but Icahn set out to be different. His mother, a gifted pianist who abandoned her dream of a concert career to the preferred “security” of a teaching position, instilled in Icahn that “nothing was ever good enough. You could always do more. You could always do better.”
Icahn’s father had very strong opinions to everything, including wealth. Carl wrote,
“Wealthy people outraged him. The social juxtaposition of a tiny group of people living in great splendor and many more living in abject poverty was anathema to him.”
Icahn’s Princeton years were immensely cerebral. A philosophy major, he spent most of his time in his dorm room reading the works of Socrates, Plato, Machiavelli, Nietzsche, and Schopenhauer. His free time was filled up with chess games and occasional rounds of volleyball.
The subject Icahn chose for his senior thesis displayed his introspective mind and obsession with testing the validity of what is an accepted fact. You find this similar trait in other great achievers. One of the premises of Peter Thiel’s book Zero to One is that following conventional thinking — accepted facts — will not lead you to innovate.
His paper, titled An Explication of the Empiricist Criterion of Meaning, was filled with his intricate thought processes. The premise of the paper was proving that empiricist thinking — observations and experiences — was the only way to have true knowledge on a subject. His mother recounted how he would
go into the library for hours and hours without coming out for fresh air. It seemed that he could think of nothing else. He was always adding, changing and refining his thoughts.
Icahn took the first prize at Princeton, giving him his first taste of “doing something better than anyone else.” Stevens wrote in the book King Icahn:
What Carl had discovered in researching and writing his thesis gave him a philosophical framework for applying his considerable intellect to real-life challenges. “Empiricism says knowledge is based on observation and experience, not feelings,” Icahn said. “In a funny way, studying twentieth-century philosophy trains your mind for takeovers. “. . . There’s a strategy behind everything. Everything fits. Thinking this way taught me to compete in many things, not only takeovers but chess and arbitrage.” He is always looking for ways to synthesize information and to arrive at original concepts others are blind to. Relying only marginally on the advice and counsel of the lawyers and investment bankers that are at his beck and call, Icahn — who has a deep-seated disdain for self-proclaimed experts — prefers to do his own thinking and his own negotiating.
Carl Icahn followed his mothers wishes and pursued medical school. He dropped out after the first year because he couldn’t stand studying something he wasn’t interested in. He later told CNN: “One of the greatest things I did for the human race was not to become a doctor.” Although he was happy to be free from medical school, he had no clue what he wanted to do with the rest of his life — a problem that faces every college graduate.
Icahn reached out to his network for help. He contacted his uncle who was working in Wall Street and ended up getting a position at Dreyfus as stock broker in 1961 during a roaring bull market. Every broker believed themselves to be a genius, including twenty four year old Carl Icahn. The market soon crashed and taught Icahn a few important lessons. Stevens write in the biography:
First, no one makes money playing the market. A small investor dabbling in stocks is always vulnerable to bigger, more powerful forces that time after time will wipe him out. Second, if he was going to emerge as a dominant force, he needed more than a broker’s training. He had to gain expertise in a market niche overlooked by the hordes of brokers content to sit by the phone and take orders. His study of empiricism had taught him that “there is a strategy behind everything,” and now he had to determine what that strategy was. The swiftness of his gains and losses made him realize that this was a business of enormous complexity and equally enormous rewards for those who could decipher the codes. To succeed required patience, intelligence, determination, and the ability to concoct shrewd strategies involving intricate and interrelated moves — precisely the kind of process that had always appealed to Carl Icahn.
Icahn decided to become an options trader, entering into a niche market that was free from the pervasive competition in a traditional brokerage. Options — complex financial instruments — allowed for Icahn’s creativity to flourish where he could delve into the nuances and intricacies of the market. He needed an advantage in order to pursue his quest “to do something better than anyone else.” He would buy a seat on the New York Stock Exchanged, funded by his rich uncle.
Icahn’s manifesto for corporate raiding comprised of three things. Icahn writes,
“It is our contention that sizeable profits can be earned by taking large positions in ‘undervalued’ stocks and then attempting to control the destinies of the companies in question by: a) trying to convince management to liquidate or sell the company to a ‘white knight’; b) waging a proxy contest; c) making a tender offer and/or; d) selling back our position to the company.”
What is interesting is that Icahn’s theory could be found in the conclusion of his Princeton paper:
“It seems to me that the quest for an explication of the empiricist meaning criterion, as it has progressed, may be likened to the tale of the city that suddenly finds itself in possession of a great homogeneous mixture of gold and sand. If the gold could be separated from the sand it would prove a great deal more valuable to the inhabitants. The wise men of the city diligently search for a method of separation. By so doing they not only vastly increase their insight into the nature of gold, sand, homogeneous mixtures, etc., but also produce a series of increasingly potent methods of separating the chaff from the gold, the meaningless from the significant.”
When Icahn pursues a company, he creates an environment rich with confusion and complexities. He sprays many ideas during negotiations with boards in order to confuse the leaders of the company he is pursuing. What will Carl do? What is he thinking? Icahn thrives in this atmosphere, able to discern between what is significant and what isn’t. Typical negotiations operate in “what do you want/what do i want.” Icahn operates in creating great confusion so he can silently go for the kill.
Viewing the world through skeptical eyes that see every man out for himself, regardless of his assertions to the contrary, Icahn prefers to confront transactions with a worst-case mentality. Before making a move, he surveys the chess board, asking himself, “What is the worst thing my adversaries can do to me and how can I protect myself on all flanks?” In planning his strategies, Icahn looks to three checkpoints simultaneously: his goals, weak points and his leverage.
During his raids, he would do a lot of work informing the shareholders how a proper CEO and Board should operate, and make it clear how he plans to improve the company if he actually “owned” it, citing that these CEOs make an enormous amount of money yet don’t provide value for you (the shareholder). Icahn creates an us vs them mentality which further frightens the board and executives.
His first takeover and selling of Tappan netted Carl $2.7 million in profit, equivalent to about $9 million today. This was by no means his biggest win, but it allowed him to start playing the game at a higher level.
When Stevens interviewed Carl Icahn for the book, he pressed him to explain his single-minded focus on work and creating an ever greater personal wealth. Stevens writes:
Icahn’s face twists up in a question mark, as if he is at a loss to explain his own compulsion. But then he refers to an essay, “The Special Dangers of High Commercial Developments,” written more than a century ago by Walter Bagehot, former editor of the Economist magazine: “We often talk as if the haste to be rich, the mere desire of wealth, were the only motive power in these great speculative transactions which, when they fail, cause so much misery and so much scandal. But no mistake can be greater. We do not for a moment mean that the desire to be rich, the passion for making wealth, is not far too great — and in a considerable measure the cause of the speculative rashness we see. But it is not by any means the sole cause, hardly, perhaps, even the chief cause. “We find as a rule that the men who can handle large armies well are apt to favour war when any international question arises which involves war; and if this be so, how much more natural it is that those who can handle or who think they can handle, great commercial combinations well, and who of course anticipate from them, not the misery which war always causes even to the victor, but the satisfaction and employment which useful commercial enterprises bring, should feel a bias of which they are unconscious in favour of the exercise of their faculty, and against the timid counsels which would have them keep within the strictest limits of prudence.”
Clearly, Icahn believes that his capabilities as “a man of commerce” are too great to be restricted by pedestrian concerns or by “timid counsels,” meaning anyone who fails to see the grand scheme of his work. Including, perhaps, his wife. “Sometimes, I feel there is no reason he really should work anymore but then where is he going to go from here,” Liba said. “In regular families, the husband works and there is always something financially to look forward to. They are building, building. “But here, how much more money he makes is not going to make any difference. The point is that he doesn’t need any more money. “But it’s the game, as he says.”