Carl Icahn: Still An Improbable Robin Hood

Icahn is out to recast himself as the investor's champion. That image has its critics

Back in the 1980s, Carl Icahn was considered a merciless corporate raider. In recent years he has tried to change his image. Glomming on to the rise of shareholder activism after the corporate scandals, Icahn has styled himself a champion of shareholder democracy. In his battle for control of Time Warner Inc. (TWX ) he sounded like Robin Hood, complete with a merry band of board candidates boasting long histories of activism. Even in defeat he acted like a man of the people.

But the image of Icahn as the shareholder's best friend doesn't always jibe with reality. Two groups are suing him, alleging rampant self-dealing at companies he controls, while a leading shareholder rights group last year recommended that he not be reelected to the board of a company he controls.

The trouble doesn't stem from Icahn's hedge fund, the $2.5 billion Icahn Partners LP, which was formed in late 2004 to hunt big corporate prey. Despite the Time Warner setback, ICAP investors have had little to complain about. The fund uses the same basic playbook that has made Icahn a billionaire over the years: It zeroes in on a company and tries to acquire it or gain control so the fund can sell off assets or the company itself. ICAP is believed to have posted a gain of over 30% in its first year. "Look at our returns," says Icahn. "That's what shareholders want."

But some of Icahn's dealings have raised eyebrows among shareholder rights advocates. In September he was hit with a lawsuit by minority holders of the Sands Casino Hotel in Atlantic City, N.J., who allege that Icahn combined the casino's assets with his holding company, American Real Estate Partners LP

, without giving them the chance to sell their shares. "I see this guy on television all the time talking about shareholder rights, and then we get this kind of stuff," says Michael Stortini, a homebuilder who runs an investment fund that owned 16% of GB Holdings Inc., which owns the Sands. Stortini is among a group of investors who have also asked a Delaware bankruptcy court to overturn the deal. An Icahn attorney says the suit has no merit.

Icahn has also rankled shareholders of XO Communications Inc., the Reston (Va.) telecommunications company he brought out of bankruptcy in 2003. Since then, XO has posted losses totaling $620.6 million. In November, Icahn and XO struck a deal for Icahn to pay $700 million for XO's national wireline business. The money would go to repay long-term debt and preferred shares, most of which are held by Icahn, leaving the company with $300 million and Icahn with a prized asset. "It seems like the definition of hypocrisy," says William Holloway Jr. of R2 Investments, an 8% shareholder that filed suit to unwind the deal, citing Icahn's control over XO's board and an "unfairly low price." Says Holloway: "Icahn has been publicly arguing for Time Warner shareholders to have a voice. Why won't he let XO minority shareholders have a meaningful vote?"


XO attorney Bruce Kraus counters that the company examined more than 80 bids and that Icahn, whose bid was the highest, agreed to step aside if a higher one emerges.

Icahn's grip over XO came under scrutiny last April by Rockville (Md.) advisory firm Institutional Shareholder Services Inc., which counseled large investors to withhold votes for five of the board's eight candidates, including Icahn for chairman, because it believed XO's board wasn't independent enough. "It doesn't matter if you own a majority of the company," says ISS Vice-President Patrick McGurn. "You can't trample the rights of minority shareholders." XO has since elected two independent directors.

Icahn is unapologetic. "My critics say I am short-term-oriented," he says. "My point is that a lot of times assets can be better utilized and enhance society when you put them in better hands than the current management." A lot of times they can. But having Carl Icahn take a big stake in a company doesn't always make for happy shareholders.

By Ronald Grover, with Roben Farzad in New York

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