Tags: Carl Icahn, corporate raiders, HSR, Netflix, poison pills
Are you not bored by corporate-raider battles? Netflix just adopted a poison pill in reaction to Carl Icahn’s acquisition of 9.98% of its stock and, of course it did, what else would it do? Just once I want to see a company say “actually you’re right, we’re hopeless, let’s sell this dog, highest bidder wins, and Icahn if you can come up with the money feel free to do a tender offer to save us the trouble”? I guess it’s no surprise that no one does – if you’re an activist or raider, you only get involved in stocks that (you think) need action and/or raiding and whose managements disagree – but, still. It’s not obvious that there are two sides to every corporate strategy question, and lots of companies that end up selling start off with the traditional pill-rattling.1
There are issues of temperament here; I suppose a 10% Warren Buffett stake would elicit a different response. Normally pills are justified as protecting vulnerable, innocent, long-term shareholders from being bamboozled and coerced by evil fast-money short-term corporate raiders, but are mostly viewed as bad governance by entrenched managements, as Icahn himself quickly noted. There’s, like, one example this century2 of shareholders actually being bamboozled and coerced by corporate raiders. Conveniently, though, that example was when Icahn acquired 80% of CVR Energy and then was kind of a jerk to the remaining shareholders, which allowed lots of other boards to feel better about their own anti-Icahn poison pills.3
Anyway some things will happen and other things won’t happen and eventually Carl Icahn won’t own any NFLX shares any more and your guess about his manner and price of exit is way, way better than mine. Let’s talk about something else and dorkier here.4 Read more »
Tags: Carl Icahn, Derivatives, HSR, Netflix
If I were the sort of guy who could come in to a company, yell at them a bunch, and get them to sell themselves to someone else at a premium, I would:
- do that often!, and
- buy lots of call options on the stock before doing it.
Right? If I bought the call options for, I dunno, $23 an option, and they had a strike price of $36 per option, let’s say, and I bought 5 million of them, and the company eventually sold itself for like $80, then I’d be stumping up like $115 million initially and getting back $220 million for a profit of $105 million, or ~91% of my original investment, and that would be sweet. If instead I boringly bought shares at, say, $59 per share, and it eventually sold for $80, then I’d be putting down ~$295 million to get back ~$400mm for only a ~36% profit. More importantly if somehow I failed to convince this company to sell itself, or even worse if I failed to convince others to buy it, the stock might go lower – maybe really low. If the stock went to $20, I’d lose my entire $115mm option premium, but that’s better than losing $195mm if I’d gone and bought the stock.
In other words, putting a company into play increases its volatility. Options gain value with volatility. Buying an option and then making it more valuable through your own actions – going out and making volatility happen – is a good strategy. So good it’s basically magic.
So good it’s impossible! Because: what kind of idiot would sell you that option?
Let’s ask Carl Icahn. Today he announced a just-under-10% position in Netflix this afternoon. The stock closed up ~14% (after being up ~21% earlier) on the news. And as it happens, Icahn’s Netflix position was almost entirely in the form of call options, so he just made a bajillionty dollars on paper.
Here is what Icahn says about those arrangements:1 Read more »