Come Back Carl Icahn! CVR Energy Still Loves You! Or Something.

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I remain fascinated by this Carl Icahn - CVR Energy situation and wanted to add two curlicues to my conspiracy theory for why he dropped his bid.

First: while it's fun to think that he may be unable to pay above $30 for a CVR merger due to let's say imperfections in his tender offer documentation, there's another, more broadly applicable, reason not to go above $30. That is: Carl Icahn is a repeat player. He bids for companies sometimes. And if you make a habit of (1) buying 80% of a company in a tender offer for $30 and (2) buying the remaining 20% in a merger a few months later for $31, then you may find it harder to get anyone to tender in your tender offer. Why not hold out for more?, they think, plausibly.

Thus it's actually a very good idea for Icahn to be a raging asshole to the remaining 20% stub:* the worse he treats them, the more likely the shareholders of his next target are to tender. The holdouts in this deal gambled and lost and are now holding an illiquid stub that they may well end up selling to him on the open market for less than his tender price. Any potential holdouts in his next deal should be quaking in their hypothetical boots.

This only goes so far, though, because the more of a raging asshole you are, the more boards can do to keep you out of the next deal. A guy well known as a defender of shareholder rights against entrenched management tends to be able to put a lot more PR - and legal - pressure on boards than a guy well known for taking advantage of minority shareholders. And Delaware courts at least pay lip service to the idea that boards have more leeway to keep out - via poison pills, etc. - raiders who "coerce" shareholders than those who don't (see, e.g., etc.).

So Icahn is in a weird position. His initial offer to the board for "$29, negotiable, but no more than $30" is ... I mean, when you say "we are offering X but could go up to Y," that is self-evidently an offer of Y. (Try it with a car dealer!) So he basically proposed to pay $30 on the back end, the same as he paid in the tender. He couldn't pay less than $30 to avoid looking like the worst sort of corporate raider. And - both for precedent reasons and also maybe for contract reasons - he can't pay more than $30. So he offered $30, with an anchoring fake offer of $29 to make it look more attractive. Now that $30 isn't so attractive, the only-at-$30 deal can't be done so might as well withdraw it.

Second: let's say I'm right and the documents require Icahn to pay out his contingent cash payment rights if he pays over $30 for the stub. This means that every dollar above $30 he pays for the stub actually costs him about $4.68. That's bad.

But! There's a potential upside. Let's say Icahn pays $31 for the remaining stub of shares. By my math that costs him $542mm and leaves him with 100% of the company. But the contingent cash payment right that Icahn gave to investors who tendered in his first-stage tender offer is a one-shot deal.** In other words, if he buys the remaining stub for $31 - or $32 or $33 or $30.01 for that matter - then he has to pay the same amount to everyone who tendered in the first offer, but then he never has to pay them again. If he then sells the company for $35, he collects $35 per share on every share and doesn't have to give a penny to the shareholders he cashed out at $31 (or $32 or $33 or $30.01).

In other words, it gives Icahn the ability to get rid of the CCP by himself, as long as he can convince the board to agree to the deal. If he actually thinks he can get $35 for CVR in the next year, then buying out everyone at $31 today and cutting off their tail upside in the stock seems like a pretty good trade for Icahn. Though perhaps one that the board would find suspicious.***

* And also to Goldman Sachs. I know: it's always a good idea to be a raging asshole to Goldman Sachs.

** I think that's reasonably clear from Section 14(b), providing that the CCP terminates after payment following a CCP Transaction Date.

*** Would they? What are a board's fiduciary duties to former shareholders who have only a CCP? Isn't this deal great?

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Goldman Surprised To Find Carl Icahn Being Kind Of A Dick

Sell-side M&A work is mostly a pretty good and lucrative business model but it has a few flaws. Try to spot a key one here: (1) you represent a target; (2) you spend your days fighting tooth and nail with the buyer to try to make them pay more and give up optionality, and generally to get more of the benefits of the deal for the target than for the buyer; (3) then the buyer acquires the target, fires all the directors and officers, changes the locks, and replaces the stationery; (4) then you get paid. Did you spot the problem? Carl Icahn did: