Sometimes what’s best for the share price isn’t what’s best for the majority shareholder, and the small investors get killed.
Carl Icahn, who is sometimes portrayed as a champion for small shareholders in forcing management change, this time ganged up with management to beat the little guy down.
WSJ: A hedge fund is alleging that Mr. Icahn — as director and majority owner of XO Holdings Inc. — hurt shareholders by snubbing three approaches to acquire the struggling telecommunications company that could have boosted the stock, according to a recently unsealed lawsuit.
Mr. Icahn rebuffed acquisition bids for debt-burdened XO, then had the company issue $780 million in preferred shares, which he bought himself, in order to refinance the company’s problematic debt. This raised his stake in the company to over 80%, where he could begin tapping into XO’s losses as a tax shield for other businesses he owns.
The result was that a shareholder who could have gotten out at $2.25 per XO share, based on one bid Mr. Icahn rebuffed, missed their exit opportunity and saw their shares fall to 12 cents each.
To add insult to injury, last month Mr. Icahn offered to buy out bloodied, remaining shareholders at $0.55 per share. One XO shareholder, R2 Investments, said thanks… but no thanks.
Mr. Icahn “spends so much time advocating shareholder rights” at higher profile companies, but has taken steps to “harm shareholders” at XO, said Geoffrey Raynor, managing member of Q Investments LP, a $1.5 billion Fort Worth, Texas, family of hedge funds that includes XO plaintiff R2.
It seems likely Mr. Icahn stayed with his legal boundaries, given he was a majority shareholder and could make the preferred issue happen. So we’re not sure how much R2 can do here; suing seems an act of desperation.
This is a good lesson, also, in why it’s a good idea not to just follow big names into the stocks they like. Their objectives may be totally different from yours, and in extreme events, like this one, you have wildly different objectives.
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