The cage-rattling strategy of Carl Icahn

Autoparts chain Pep Boys has agreed to be acquired by financier Carl Icahn. Icahn had been in a bidding war with Bridgestone Corp. for the company, and he won with a bid of $1 billion, or about $18.50 per share. But the thing is, Icahn would have won even if he lost. 

Here's how: A while back, Icahn's company Icahn Enterprises bought a 12 percent stake in Pep Boys. Then he threatened to buy more, essentially taking Pep Boys over. That launched other bids for the company.

"Getting a bidding war going drives up the stock price," said Peter Cohan, who teaches strategy and entrepreneurship at Babson College in Massachusetts. So even if Icahn lost the bidding war, he can cash out at a profit. "He's done this over and over again," Cohan said.

In this case, Icahn will very likely get control of the company, which he can then rearrange or sell for parts as he has done with other companies in the past. Either way he wins.
In the more than 30 years that Icahn has been at this, a central element to his strategy has been cage rattling.

"He gets into a company that's not performing well, buys shares, gets on the board and frightens management," said Mark Stevens, author of "King Icahn" and CEO of marketing firm MSCO. "He threatens the guys that are running the company that they are going to lose their jobs or control of the company."

That's unless they do something to improve the stock price or dividends, to somehow reward investors — meaning reward Carl Icahn.

A common criticism of this approach is that it can be very short-term focused.

"What's the value that he's adding to the operations?" asked Cohan. "Really, zero."

Still, "those gains are not just for the activists but for all public-company shareholders," said Robert Jackson, professor of law at Columbia.

With the Pep Boys deal scheduled to close during the first three months of 2016, we'll see what Icahn does with it. But it's a safe bet that Pep Boys won't be the last cage he rattles.

Let's just take a look at what Icahn did here. A while back, he bought a 12% of pepboys. Then he threatened to buy more of pepboys to take it over. Well, all kinds of people freak out, and other people start bidding for the company.

Act1 GETTING A BIDDING WAR GOING WHICH DRIVES UP THE STOCK PRICE

Peter Cohan teaches strategy and entrepreneurship at Babson College. So even if Icahn lost the bidding war, he's driven up the stock price and can cash out at a profit.

Act2 HE'S DONE THIS OVER AND OVER AGAIN OVER THE YEARS

In this case he actually will very likely get control of the company, which he can rearrange or improve operations or sell for parts like he's done on occasion in the past. Either way he wins. But over the 30 years that Icahn has been at this, a central element to his strategy, has been cage rattling.

Act3 GET INTO A COMPANY THAT'S NOT PERFORMING WELL, BUY SHARES, GET ON THE BOARD, FRIGHTEN MANAGEMENT,

Mark Stevens is the author of King Icahn and CEO of marketing firm MSCO.

Act 4 THREATEN THE GUYS WHO ARE RUNNING THE COMPANY THAT THEY'RE GONNA LOSE THEIR JOBS OR CONTROL OF THEIR COMPANY

Unless they do something to improve the stock price or dividends, somehow reward investors.... meaning reward Carl Icahn. Now, a common criticism of this approach is that it can be very short term focused. Again Peter Cohan.

Act5 WHAT IS THE VALUE THAT HE'S ADDING TO THE OPERATIONS OF THE COMPANY, REALLY ZERO.

But, as Robert Jackson professor of law at Columbia points out,

Act6 THOSE GAINS ARE NOT JUST FOR THE ACTIVISTS, BUT ALL PUBLIC COMPANY SHAREHOLDERS

Now that Icahn is likely to get control over Pepboys, it remains to be seen what he'll do with it. But as long as Icahn's around Pepboys probably won't be the last cage he rattles.

In NY I'm SB for MP