Carl Icahn: Raider or Trader?

Includes: AABA, MSFT
by: Kevin Cook

The July issue of Smithsonian magazine has a fascinating article on Viking explorers titled “Raiders or Traders?”, in which the author challenges the overwhelming stereotype of plundering marauders by digging through evidence of their mercantile habits.

I’ve been holding a similar discussion for several weeks about the exploits and objectives of one of the world’s most successful investor-pillagers.

In mid-May, after it became public knowledge that Carl Icahn had recently amassed a large position in Yahoo! (YHOO) shares using options, we posted a piece called “Carl Icahn: Yahoo Raider” (posted on Seeking Alpha, June 11th) explaining the nature of his “over-the-counter” [OTC] transaction.  In addition to buying about 10 million publicly traded shares of Yahoo! stock for around $25, Icahn made a privately negotiated deal with an investment bank to control another 49 million shares by buying 490,000 OTC call options and selling 490,000 OTC put options.

Icahn’s stated goal was to influence Yahoo! leadership to accept Microsoft’s (NASDAQ:MSFT) buyout attempt.  As I noted then, even though the options positions didn’t give Icahn the voting rights he needed to gain a seat on the Yahoo! board of directors, they prepared him for such a possibility if and when the call options, with a striking price near $25, became worth exercising, or converting their rights into actual stock.

The question I am asking today: Is Icahn acting in his traditionally perceived role as a corporate raider, or is he really just a great trader?  To answer this, I need to give you some more background since mid-May.

On June 16th, right after Yahoo! made a small partnership deal with Google, and the shares continued to slide below $25, I wrote a piece suggesting that individual investors had a nice opportunity to ride the coattails of the billionaire buyout king (“Yahoo Options Spell Opportunity - Even If You’re Not a Billionaire,” posted on Seeking Alpha June 18th).  I recommended either buying the October 25 call for $1.60 and/or selling the October 20 put for $1.10.  This trade, similar to Icahn’s options play, would give you rights to buy Yahoo! if it traded above $25—for a cost of only 50-cents, if you both bought the call and sold the put at those prices.  While I admitted that I had no idea of the fundamental worth of Yahoo! shares, I was willing to bet my money on Icahn, Microsoft, and now Google (NASDAQ:GOOG), that they knew more than I.

Last week, as Yahoo! stock traded all the way back down below $20—where it was originally before Microsoft’s $31 bid in February—Icahn’s hopes of “cleansing” the Yahoo! board of his nemesis Jerry Yang and other members who rejected the deal seemed bleak.  Then, on Monday, both the deal possibilities and the stock were brought back to life by some interesting conversations revealed by an equally intriguing letter.  Carl Icahn issued an open letter to Yahoo! shareholders that detailed his discussions with one Mr. Steve Ballmer, CEO of Microsoft.

The letter is a fantastic window into the mind of activist investor like Icahn.  In it he describes how Ballmer and he value a deal to buy Yahoo! only if they could replace both the board and key management.  As arrogant as that sounds, like typical corporate raiding language, their logic is pretty convincing.  Ballmer’s view is that any large deal to acquire Yahoo! would tie up significant amounts of capital as “commitments” until government regulators could approve the transaction.  The risk for Microsoft is that during that waiting period, possibly nine months or longer, the unreliable Yahoo! management could drive the company into the ground.

Makes sense and it doesn’t sound like corporate raider talk either, like they’re trying to break a company into pieces so they can squeeze out the assets and sell them.  It sounds like an investor mind-set with a healthy dose of trader’s skepticism.  The distinction between “raider” and “trader” might be one of semantics, but I thought it was worth discussing to make a point about how great investors think and value businesses, regardless of the strong-arm leverage they may use.

What’s ahead for Yahoo! shares?  More volatility for sure.  Yesterday, I spoke with Jud Pyle, Chief Investment Strategist at The Options News Network (the company that I also provide content for), on his Mad About Options show.  This is’s “options take” on Jim Cramer’s recent stock ideas.  We discussed Cramer’s call last week on Yahoo! when he said the stock “is just a steal” at $20.  Since I agreed, I had to get some more options ideas from Jud.  He said implied volatility is high right now in Yahoo! options, as measured by the premiums being paid for them.  The 52-week range of implied volatilities is 30% on the low end and 73% on the upper.  Currently, at-the-money option premiums are trading at volatilities in the mid to upper 60s.  And that means, if you can find low-risk ways to capture some of those inflated premiums, you may have a winning trade on your hands.

So, if you also like Yahoo! as an investment or as a trade, but are skeptical about management’s wisdom or performance in the near term, you could initiate a buy-write trade, where you buy the stock and sell a call to capture premium that enhances your return.  Today, you can buy the stock for around $24.25 and sell an August 25 call for about $1.65, giving you a break-even of $22.60 and a return of 7.3% for 37 days.  Plus, you will realize all gains up to $25 if the stock goes higher and you are assigned on the short call to hand over your shares.  If the stock stays below $25, you will not have your shares “called away.”  Either way, you will keep the $1.65 in premium you collected for the call and your maximum risk is $22.60.  And as soon as August options expiration has passed, if you still own the stock, you sell another call for every 100 shares owned.

Jud also has an option play if you are bearish on Yahoo! and want to take advantage of high implied volatility in the front months.  Check out our Mad About Options chat on Yahoo! where he describes the put time spread that is just the ticket for this environment.  You can find that video at either or’s Options Update page.  As always, consult your broker or investment advisor before you trade any options.