Buffett, Icahn Know Crisis Means Money

'Becoming Warren Buffett' World Premiere - Arrivals
2017 Getty Images


Warren Buffett and Carl Icahn butted heads in a showcase of their vastly different styles when it comes to profiting from corporate crises. “The Quiet Man” from Omaha won Round One over “The Music Man” from Queens. Who will be the final victor? Maybe both.

The “crisis” this time is Occidental Petroleum. Buffett’s Berkshire Hathaway provided $10 billion so Oxy could outbid the much-larger Chevron for Anadarko Petroleum. Occidental closed the deal on August 8 after Anadarko shareholders overwhelmingly approved the $38 billion offer.

As is his style, Buffett stepped in to quench an existing crisis – Oxy’s need for cash – as quietly as one can in such a high-profile event. This was not a fight of his making and Buffett has had little to say about it. Sort of like "Quiet Man" John Wayne in the 1952 film about the American boxer who returns to his Irish homeland and tries to sidestep provocation. (Mr. Wayne ultimately gets into one of the great movie brawls of all time. Definitely not Mr. Buffett’s style.)

And, as is his style, Icahn has been acting as town crier for a crisis many people may not know about. He says Occidental shareholders have their own version of trouble in River City, much like “Music Man” Professor Hill warned those Iowans. (No insinuation here that Mr. Icahn is deceiving anyone or running a con, much less promoting a boys’ band.) He says buying Anadarko was a bad deal and management has performed poorly. In a letter to Oxy shareholders he said Buffett took CEO Vicki Hollub “to the cleaners.” Icahn went on CNBC to say, “The whole thing is a travesty."

With his 4.4 percent stake in Occidental, Icahn admitted he couldn’t stop the Anadarko acquisition. Instead, he has started a proxy fight looking to replace four Oxy directors with a slate he supports. He says Oxy management needs to head in a new direction.

The Chinese word for crisis is not composed of two characters signifying "danger" and "opportunity," despite what you may have heard from some luncheon speakers. In the case of Buffett and Icahn, however, crisis may stand for opportunity and profit.

One does it by being the lender of last resort. The other by being the prophet of last retort.

Berkshire is receiving an 8 percent interest rate on its $10 billion of preferred shares, or $800 million a year. It also got warrants to buy 80 million shares of Occidental at $62.50 a share, substantially above Oxy’s current price but worth as much as $5 billion by some estimates. Icahn and others have estimated Occidental is paying Buffett and Berkshire at least $1.5 billion more than if it had used other means to raise the $10 billion.

This is Buffett’s kind of deal. He has done well by helping companies such as Mars/Wrigley, Bank of America, Goldman Sachs, Restaurant Brands International, Dow Chemical and General Electric in similar preferred stock deals. Each offered nice premiums and relatively low risk.

Icahn’s style is the opposite of Buffett’s. He doesn’t eschew attention; he seeks it out as part of his strategy. Over more than four decades, he has made billions by identifying situations where he believes there is unexploited value, making an investment and then turning up the heat on management. To name just a few, he has tangled with (proxy fights or threatened) Apple, Dell, Netflix, eBay, Xerox, AIG, Gannett, Cigna, RJR Nabisco and USX (back when it was a holding company for U.S. Steel and others).

Even when he doesn’t get into a fight, news that Icahn has made an investment in a company can result in what is called the “Icahn lift.”

At age 83, Icahn shows no sign of losing his taste for a fight. Activist Investor identified him as the leading activist investor in the first half of 2019.

Buffett and Icahn don’t always come out ahead in their investments. Buffett’s $12.25 billion investment in what is now money-losing Kraft Heinz is deep in the red. And Icahn is in the hole with his Occidental stake. OXY’s share price has dropped by 24 percent since Icahn’s initial investment was first reported and shares are trading at a 13-year low.

But both Buffett and Icahn come out ahead more often than not. Buffett was No. 3 on the annual Forbes ranking of the world’s richest people with a net worth of $82.5 billion. Icahn was 61st with a net worth of $17.4 billion.

And, if Buffett is right about those warrants, they both could do OK with their Anadarko stakes.

">


Warren Buffett and Carl Icahn butted heads in a showcase of their vastly different styles when it comes to profiting from corporate crises. “The Quiet Man” from Omaha won Round One over “The Music Man” from Queens. Who will be the final victor? Maybe both.

The “crisis” this time is Occidental Petroleum. Buffett’s Berkshire Hathaway provided $10 billion so Oxy could outbid the much-larger Chevron for Anadarko Petroleum. Occidental closed the deal on August 8 after Anadarko shareholders overwhelmingly approved the $38 billion offer.

As is his style, Buffett stepped in to quench an existing crisis – Oxy’s need for cash – as quietly as one can in such a high-profile event. This was not a fight of his making and Buffett has had little to say about it. Sort of like "Quiet Man" John Wayne in the 1952 film about the American boxer who returns to his Irish homeland and tries to sidestep provocation. (Mr. Wayne ultimately gets into one of the great movie brawls of all time. Definitely not Mr. Buffett’s style.)

And, as is his style, Icahn has been acting as town crier for a crisis many people may not know about. He says Occidental shareholders have their own version of trouble in River City, much like “Music Man” Professor Hill warned those Iowans. (No insinuation here that Mr. Icahn is deceiving anyone or running a con, much less promoting a boys’ band.) He says buying Anadarko was a bad deal and management has performed poorly. In a letter to Oxy shareholders he said Buffett took CEO Vicki Hollub “to the cleaners.” Icahn went on CNBC to say, “The whole thing is a travesty."

With his 4.4 percent stake in Occidental, Icahn admitted he couldn’t stop the Anadarko acquisition. Instead, he has started a proxy fight looking to replace four Oxy directors with a slate he supports. He says Oxy management needs to head in a new direction.

The Chinese word for crisis is not composed of two characters signifying "danger" and "opportunity," despite what you may have heard from some luncheon speakers. In the case of Buffett and Icahn, however, crisis may stand for opportunity and profit.

One does it by being the lender of last resort. The other by being the prophet of last retort.

Berkshire is receiving an 8 percent interest rate on its $10 billion of preferred shares, or $800 million a year. It also got warrants to buy 80 million shares of Occidental at $62.50 a share, substantially above Oxy’s current price but worth as much as $5 billion by some estimates. Icahn and others have estimated Occidental is paying Buffett and Berkshire at least $1.5 billion more than if it had used other means to raise the $10 billion.

This is Buffett’s kind of deal. He has done well by helping companies such as Mars/Wrigley, Bank of America, Goldman Sachs, Restaurant Brands International, Dow Chemical and General Electric in similar preferred stock deals. Each offered nice premiums and relatively low risk.

Icahn’s style is the opposite of Buffett’s. He doesn’t eschew attention; he seeks it out as part of his strategy. Over more than four decades, he has made billions by identifying situations where he believes there is unexploited value, making an investment and then turning up the heat on management. To name just a few, he has tangled with (proxy fights or threatened) Apple, Dell, Netflix, eBay, Xerox, AIG, Gannett, Cigna, RJR Nabisco and USX (back when it was a holding company for U.S. Steel and others).

Even when he doesn’t get into a fight, news that Icahn has made an investment in a company can result in what is called the “Icahn lift.”

At age 83, Icahn shows no sign of losing his taste for a fight. Activist Investor identified him as the leading activist investor in the first half of 2019.

Buffett and Icahn don’t always come out ahead in their investments. Buffett’s $12.25 billion investment in what is now money-losing Kraft Heinz is deep in the red. And Icahn is in the hole with his Occidental stake. OXY’s share price has dropped by 24 percent since Icahn’s initial investment was first reported and shares are trading at a 13-year low.

But both Buffett and Icahn come out ahead more often than not. Buffett was No. 3 on the annual Forbes ranking of the world’s richest people with a net worth of $82.5 billion. Icahn was 61st with a net worth of $17.4 billion.

And, if Buffett is right about those warrants, they both could do OK with their Anadarko stakes.

I am an expert in crisis leadership and communications, having spent 40 years reporting on, preparing for, responding to and teaching about it. Named the 2019 Distinguis...