Icahn the Hunter has become the hunted

Ido not know what Carl Icahn eats for breakfast. Shark blood? He is supposed to be the most feared man on Wall Street, after all. Tuesday morning, he got something even less appealing: A short seller. Hindenburg Research attacked Icahn Enterprises as an overvalued, dangerously levered confidence trick for retail investors who do not know any better. It is unclear whether Icahn will care; he has been called worse — raider, devil, evil Captain Kirk, and so on — but this time he should.

For a start, Hindenburg has a track record, both at being right enough in its theses and being every bit as obstreperous as the notorious activist investor. But perhaps more important, its criticism of IEP, Icahn’s main investment vehicle, is cleareyed and, at first glance, hard to disprove.

It argues that IEP’s stock trades at a big premium to its assets, which is true. It argues that IEP’s dividend, which at about 15% is the highest yielding of any US large-cap company, is unsustainable. The short seller doesn’t purport to have uncovered a complex fraud, as with its most prominent campaigns to date: those against failed electric-vehicle maker Nikola Corp and the business empire of billionaire Gautam Adani. This, rather, is a takedown of interpretation.

“We think Icahn, a legend of Wall Street, has made a classic mistake of taking on too much leverage in the face of sustained losses: a combination that rarely ends well.” Compare that with the claim that Adani “engaged in a brazen stock manipulation and accounting fraud scheme over the course of decades.” Indeed, the only mention of “fraud” in the Icahn Enterprises deck references a 1987 charge against the founder of investment bank Jefferies, who died more than 20 years ago. The Adani deck, by contrast, contained 43 mentions of the word.

But the substantive difference matters little. Fraudulent or not, and Hindenburg dances around the question with a reference to “Ponzi-like economic structures,” IEP’s shares were crushed by the salvo, falling as much as 21%. For Icahn, who along with his son, Brett, controls 85% of the $14.2 billion company, that cannot be comfortable. But the ramifications for his day-to-day business of excoriating public companies is perhaps of greater concern.

An attack from Icahn typically involves several tropes. The usual ones — “you the management and board are the worst thing we’ve ever seen, fire yourself and let us do your job” — are supplemented by references to Icahn’s stellar track record running IEP. The argument of “put me on your board because I am terrifying” is often cloaked as “put me on your board because I have better capital allocation skills than you: Behold IEP”.

Unless he can counter the Hindenburg narrative, Icahn may find his traditional pitch less persuading. His response so far that “performance will speak for itself” has done nothing to arrest the IEP stock slide. Nor is he likely to win much sympathy for the complaint that the report “was intended solely to generate profits on Hindenburg’s short position at the expense of IEP’s long-term unitholders.” As true as that statement may be, the prospect of Icahn having someone generate profits at his expense will be relished by many.

Icahn, like activist investors everywhere, is a master of arbitraging the narrative asymmetry that arises when a private investor attacks a public company. Bound by fair disclosure rules, companies can’t say much beyond boilerplate such as “we value the views of all our shareholders”. Investors have no such limitations and can — and do — savage everything from individual directors to company performance. Unable to resist a dig, Icahn’s fellow activist investor Bill Ackman spoke for many of those targeted executives and directors on Tuesday, highlighting the “karmic quality” of the situation.

Betting against Icahn is risky. He has won often and spectacularly enough to ensure that, and it’s folly to suddenly pivot to view him as prey and no longer predator. Icahn’s ugliest fight was against Ackman in 2013 when the two battled ferociously and publicly over Herbalife. That same year he launched seven campaigns against companies including Apple Inc and Dell Inc.

He will not back down from this fight. But it may come at the cost of weakening him for whomever he picks on next time.