The markets, it’s said, have a short memory. Usually the dictum relates to individual stocks, bonds or asset classes. But if the late-career beatification of Nelson Peltz and Carl Icahn is any guide, it might apply to people, too.
Peltz, founding partner of Trian Fund Management, and Icahn, of Icahn Enterprises, were given star billing on Wednesday at Delivering Alpha, the hedge fund conference co-hosted by Institutional Investor and CNBC at New York’s Pierre Hotel. Each obliged with displays of investment acuity, bluntness and wit as they expounded on their approach to managing money and explained their latest moves on high-profile targets: PepsiCo and Dell, respectively. To witness the rapturous audience reaction, it was easy to forget that these were once two of the most divisive figures in American business, widely derided as cutthroat corporate raiders and greenmail artists uninterested in the long-term health of the companies in which they invested.
Somehow, over the course of the last two decades, these two fabled investors have morphed from suspect outsiders into stout defenders of American capitalism, righteous citizens dedicated to safeguarding the country’s most-storied companies from the twin evils of bad management and poor governance. On the evidence of Wednesday’s conference, the conversion from market bad boys to virtuous protectors of shareholder rights is complete.
How did this happen? The simple passage of time is no doubt a large part of the explanation. In the 1980s, the golden age of the corporate raid and the leveraged buyout, hostile takeovers were a new and unfamiliar investment strategy. Managements cast themselves and their employees as blameless victims of a raider class intent on downsizing, asset-stripping and self-enriching at all costs.
Familiarity has arguably taken the sting out of this narrative, as has the experience of some of the target companies themselves. Peltz’s turnaround of Snapple, which he bought for $300 million in 1997 and sold to Cadbury Schweppes three years later for $1.45 billion, is widely held up as an example of how to revive a flagging business’s fortunes.
On Wednesday, it was telling that in the moments after interviewer Andrew Ross Sorkin quizzed Peltz on rumors that he had taken a large stake in E.I. Dupont de Nemours and Co., the chemicals giant’s stock jumped 3 percent even though Peltz declined to confirm the speculation. Pepsi gained 1.5 percent after Peltz outlined his plan for the company to buy Mondelez International, combine Mondelez with its Frito-Lay snack business and then spin off its soft drinks business. Mondelez, which was split off from Kraft Foods Group last year, rose 2.1 percent. (Read more: Latest from Third Annual Delivering Alpha Conference via Storify)
In recent years, Peltz and Icahn have been more regularly described as “activist shareholders.” Peltz, however, demurs at that moniker, which has negative connotations for some. In the Delivering Alpha interview, he styled himself as a “constructivist shareholder.” Both he and Icahn appear to relish the association with shareholder interests.
“I’m a cynic about corporate governance in America,” said Icahn. Governance standards are much higher in other countries and he wants to do something to “fix” the situation in America. Icahn lambasted the board of Dell, where he is engaged in a fierce fight for control against founder Michael Dell, saying “I’ve never seen one as bad as this.” The board duly lived down to Icahn’s expectations on Thursday when it postponed a planned shareholder vote on the Michael Dell bid because it lacked sufficient support.
Icahn and Peltz have deftly allied their pursuit of profit with a greater public good: extracting value and optimizing management efficiency on behalf of shareholders. The ruthless company-gutters of yesteryear have been reborn as virtuous warriors fighting for a fair deal for the voiceless masses.
So complete was the transformation that Icahn even took a few swipes at some of his hedge fund rivals for talking down or shorting stocks that he favors, with his characteristic biting humor. Asked to comment on the bearish view about Dell put forward by Jim Chanos, the Kynikos Associates managing partner and notorious short-seller, Icahn said: “I like Chanos, but look at some of the stocks he’s shorted; they’ve gone up. With all honesty, I think I have a much better record than he does. But I like the guy.”
Icahn was even more damning with his claims of affection for William Ackman, the head of Pershing Square Capital Management. In December, Ackman publicly announced a major short position against nutritional supplements provider Herbalife after labeling it a Ponzi scheme, only to see Icahn go long the stock and ignite a dramatic rebound. “I like him,” Icahn said of his rival. “Anyone that makes me a quarter of a billion dollars, I like.” At this late stage in his career, Icahn’s comedy schtick is doing as much for his reputation as his investing acumen.
The changing nature of finance has also, arguably, cast a warm glow on the type of investing Icahn and Peltz do. In the 1980s, corporate raiders were easy to characterize as Gordon Gekko, the ruthless, greed-is-good anti-hero of the film Wall Street. Masters of the universe made finance inordinately more complex since then, full of exotic derivatives, securitizations and high-frequency trading. The time-honored strategies of Peltz and Icahn seem almost homey by comparison.
Peltz reminded the Delivering Alpha crowd that he got his start working in Brooklyn for his father’s food distribution business. (To this day, he apparently has a piece of homespun business advice from his father printed on the office mugs at Trian: “Sales up, expenses down.”) Icahn, meanwhile, put a Horatio Alger gloss on his quest for Dell: “I would love to own this company. I was a kid from Queens, I’m interested in making money.” Together, the pair presented themselves as gruff, old-school, outer borough New Yorkers in a world beset by so much financial trickery.
As hammy as the act was, there’s some truth to it. Icahn and Peltz practice a very basic, fundamentals-driven investment strategy: Find a company that’s underperforming but still has a solid underlying narrative, cut out its weaknesses and maximize its strengths, rinse and repeat. It’s a far cry from complicated instruments and tactics that helped bring the financial system to the verge of collapse a few years ago.
In short, Icahn and Peltz haven’t changed; the world around them has. When there are so many other evils to get anxious about, corporate raiders start to look cuddly by comparison. Judging by Wednesday’s performance, the ongoing love affair between Peltz, Icahn and the investment community has plenty of room to run.