Carl Icahn told an amazing 8-minute story that explains his entire philosophy about activist investing
Carl Icahn delivered an all-time great story about one of his early business conquests at the Dealbook conference on Tuesday afternoon.
He was asked about activist investing, and whether he was in companies for the long haul, or just wanted to shake things up, then leave.
This question prompted an eight minute story about American Car and Foundry, ACF, one of his first investment targets.
The story is worth the time. But, if you're short on time, here's the punch line: A lot of companies get fat and happy. His job is to find those companies and clean up the rot. Companies will try to wave their hands and say what they are doing is hard to understand, but if you cut through all of that you can find the truth and help a business get in better shape.
But really, grab some headphones, sit back and enjoy. The story gets better and Icahn gets deeper in. (We have a quick transcript below that we edited to clarity. It's not exact.)
Icahn starts at 6:08. He says, I don't mind, you have some drinks. I'll tell you fast little story here...
I was a kid, I see this ACF, I'm a workaholic, I see this ACF, it sells for $30, they don't make any money, I say, this is so cheap.
I had a fair amount of money, nothing like today, but $400-$500 million, I bought a lot of the stock. They got all these assets, I say, what the hell? I get control of the company.
I met the CEO, after a bit of a fight, he says, great to have you. They manufacture rail cars. When you make rail cars, the governement wants to incentivize you. The cars can depreciate over 4-5 years, but you keep the cars over 40 years. But you need to make money.
They got 12 floors on 3rd ave.
I go, they say go to the 12th floor. And they try to explain: These guys do this, these guys do this. I spend the whole day, look at my yellow pad, can't figure out what the hell they do.
I go back the next day, 7th floor, 9th floor, 8th floor, I say, I'm not an idiot I can't figure out what they do, it's razzle dazzle. They say this is very arcane. I say, I want to go to St. Louis, I want to see the guy who is the COO. They say don't go, he's very scared of you. They depend on us, and we tell them what to do and they are worried you might do something with us.
I say, screw these guys, I call a guy, his name is Joe in St. Louis. He says, of course I'd love to see you. I say, don't tell the guys, I don't want them to know. I say, I don't want you be nervous, he says why should I be nervous? I say, right.
This guy Joe, he was like a John Wayne character. He was a captain in the Marines, I was scared of him. We're talking, we're laughing, he's showing me stuff, we're laughing. I say, I want to have a drink.
Over martinis, I ask, How many of those guys in NY do you need to support your operation, because I honestly can't figure out what to do.
Joe says, I'll tell you what you should do. I'll tell you how many supports I need. I need minus 30.
You don't have the balls to do what I will tell you to do: Get rid of all of them tomorrow. I'll need 30 people less that I will need to support.
I go, and I say, Hey this is unbelievable. Now, today, I would have done it immediately.
Then, I still was wondering, maybe Joe's a little crazy. How do I get rid of 12 floors of people?
I knew the guy that owned the building. He says he could use the lease, and he doesn't think these people do anything. He watches them. I say, Bullshit, he's a real estate guy, what does he know.
I now go, and I figure what the hell do I do. I get a consultant. You know, sometimes they're helpful, not often.
I bring in these three guys, I say, I want to know what they do. They say, it's arcane. I say, yeah I heard that word before. They say don't worry about it, 3 weeks, it's quarter of a million dollars.
They come back in 3 weeks, with a book like this, big book. Yellow graphs, green graphs, I say, hey I ain't gonna read this book and I'm color blind anyway.
He looks at me and smiles, he says, look Mr. Icahn, you been square with us, so I'm going to tell you something, we don't know what they do, either.
I am not joking! I say, screw it, I call Joe up, he says great, great do it, got rid of the whole 12 floors, sold the lease for $10 million, that was a lot then.
Here's the crazy thing: If you shut down a grocery store, you'd hear from somebody. Apple's aren't delivered, pears go bad, something. If you had a flower shop, the roses wilted.
It was like out of a science fiction, nobody called me. It was like the bomb hit and killed all the people and nobody stayed.
So, I follow those principles. A lot of companies, the CEO is making a lot of money, he doesn't care, and today it's very dangerous because these mediocre companies are making earnings that I think are very questionable.