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Does It Pay To Follow Carl Icahn?

Carl Icahn's reputation as an activist investor is long established. But what of his record as an activist investor? Can investors make money by following Icahn's investments?

Investors hoping to clean up from Carl Icahn’s $80 bid for Clorox Co. must be pretty disappointed so far.

The stock is currently trading below 70, which also happens to be the price Deutsche Bank said it was worth in July when Soros made his offer.

However, investors who might be mulling jumping aboard Icahn’s latest activist target — Commercial Metals Co. — should think several times before making a move.

History shows that investors rarely fare well when they participate in Icahn’s proxy battles, especially if the company is not in the biotechnology or pharmaceuticals industry.

FactSet SharkWatch, which tracks corporate takeovers, looked at the stocks of 18 companies that were targets of Icahn campaigns in which the dissident gained at least one board seat, going back to 2005.

Eight of them were proxy fights. Icahn won two of the fights — at Blockbuster and Mentor Graphics Corp. Two resulted in split votes — in which FactSet generally calls any dissident a de facto winner — and the target company agreed to settle four of the proxy fights in which concessions were made.

And what happened to the stocks of the 18 companies Icahn targeted? It is not pretty.

One month after the board seats were granted, the stocks, on average, had fallen 5.15 percent (the median was 4.15 percent). This compared with an average loss of 0.17 percent for the Standard & Poor’s 500 index, an 0.11 percent drop for the S&P 1500 and a gain of 0.11 percent for the Russell 3000. (The median gains ranged between 1.7 percent and 1.9 percent for the three indexes.)

Seven of the 18 stocks rose in price, including two that increased more than 17 percent (Lear Corp. and Amylin Pharmaceuticals) and one that climbed more than 14 percent (Genzyme Corp.). Amylin and Genzyme are biopharmaceuticals companies.

Looking out six months, 16 stocks (two of the 18 are more recent investments) had fallen, on average, by 12.54 percent (the median decline was 10.11 percent). This compares with average gains of 2 percent for the S&P 500, 2.36 percent for the S&P 1500 and 3.51 percent for the Russell 3000. (Median returns ranged between a positive 3.8 percent and 5.6 percent for the three indexes.) This is a huge underperformance for Icahn’s stocks.

Once again, seven of the stocks rose during this period. They included a gain of 48.41 percent for Genzyme, 28.09 percent for Hain Celestial Group, 26.46 percent for Lear, 24.26 percent for Enzon Pharmaceuticals and 18.15 percent for Amylin. The huge gains were mostly enjoyed by the biopharmaceuticals.

It gets uglier the further out you go.

One year after Icahn secured board seats, the 14 stocks (that qualified) were down, on average, 13 percent, compared with gains of 1.34 percent, 2.12 percent and 4.48 percent for the S&P 500, S&P 1500 and Russell 3000, respectively. The median gains for the three indexes were much larger: 13.64 percent, 13.82 percent and 16.22 percent, respectively.

What’s more, after one year just six of 12 stocks (six of the 18 are more recent investments) were in the black. Hain Celestial was up more than 68 percent, while Enzon and Amylin were each up in the low to mid-40 percent range. Take-Two Interactive Software was up close to 30 percent.

Last, FactSet looked at these stocks two years after Ichan acquired the board seats. At that point, 11 stocks qualified for the study. They lost, on average, 5.31 percent, versus gains ranging from 3.20 percent for the S&P 500 to 9.38 percent for the Russell 3000.

The median returns were even more dramatic: Icahn’s stocks lost more than 23 percent, compared with losses of 8.01 percent to 13.85 percent for the three indexes.

Those are colossal disparities between mean and median returns. The reason: The four stocks that made money were up hugely. They are also all biopharma or pharmaceuticals stocks. ImClone Systems Inc was up about 128 percent, BioGin Biochemicals Co, nearly 77 percent, Enzon 66.5 percent and Amylin a little more than 15 percent.

Moral of the story: If it is not a drug company, don’t be so quick to play along at home once Icahn secures a seat on the board.

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