HBO has recently been published Icahn: The restless billionaire, A documentary about 85-year-old Wall Street legend Carl Eiken Freshly, the documentary does not portray the icon as negatively as one would expect from an awakened Hollywood production company. Instead, it demonstrates how Icahn’s staff investments make money for shareholders and promote corporate prudence.
Without mentioning it, the documentary demonstrates how Ican’s career embodied what economists call “creative destruction,” a term coined by Joseph Schumpeter to describe the paradox of progress in free-market economics. Economic growth is erratic. New technology displaces old ones, creating jobs and destroying companies and industries. However, society becomes more productive and richer, as citizens reap the rewards of new products, industries and jobs.
Active investors like Icahn encourage creative destruction. They take big positions in companies that they believe are undervalued or mismanaged and push for change for the betterment of the company. If they succeed, the company’s share price rises, and the active investor is rewarded. However, when things go awry they run the risk of losing a lot (or all) of their investment.
Corporate rider or activist investor?
The media often denounces active investors as “corporate attackers” or “vulture capitalists”. They are criticized for taking big positions in the company, cutting costs (including jobs) and selling their shares when the share price rises.
But what critics miss is that some jobs are not always good for the company. The failure of management to effectively manage a public company is not the fault of the active investor. Often, the documentary shows, corporate decisions benefit the CEO or management rather than the company.
An example is the role of an active investor in Icahn’s war with the CEO of the Tappan Company in 1979. Icahn, a young, pioneering employee investor, took a big position at Tappan, a popular American kitchen appliance company. To him, the company was valued at $ 7 per share. He built a large stock position in the company and fought a proxy to get a seat on the board.
Once on the board, he used his seat for positive change. Icon annoyed the CEO at a board meeting over the merger proposal, calling it “the worst deal in economic history.” Icahn thought it would benefit the CEO at the expense of the company. The move surprised other board members and the CEO dropped his plan to move forward with the deal. A few months later, Tappan was bought by Electrolux for $ 17 a share, which proves Icahn.
Activist investors risk their money to improve public companies and against corporate mismanagement. When successful, activists raise the value of the company and win over both employees and shareholders. The general public also benefits from healthy, valuable companies that strengthen the economy.
Creative destruction creates value
Creative Destruction is a powerful illustrator of the “suffering” and “profit” caused by innovation in the free market. The life of Guilded Edge industrialist Andrew Carnegie serves as an example. Carnegie’s father lost his job due to technological advances in the weaving industry, forcing him to leave Scotland in search of opportunities in America. A generation later, his son Andrew will revolutionize the steel industry and become the richest man in the world. Carnegie’s father suffered the pain of destruction, while Carnegie enjoyed the benefits of innovation.
In the end, we are better off because of creative destruction. Innovation comes at the expense of certain jobs and industries, but very few people would choose to live without today’s technology.
Without healthy companies for innovation, creative destruction is hampered. Active investors play an important role in overcoming the barriers to innovation. Icahn’s corporate activism initiates corporate growth and eliminates chronic inefficiency from corporate mismanagement. While its activities may cost some jobs in the short term, it benefits the shareholders and the public because companies can freely innovate and produce better products.
Conclusion
Although the documentary succeeds in showing the positive side of working investors like Icahn, it seeks to inspire by talking about his life. A poor Jewish child in Queens, he has worked hard all his life, and now, at the age of 85, he is worth about $ 20 billion. Icahn comes across as a fierce but humble person. The documentary quotes him as saying, “This is something you have to remember, if you are not careful it will not last forever.”
Icahn is a Tour-de-Force, relentlessly pursuing creative destruction in its nearly 60-year career in the financial markets. Creative destruction is sometimes painful but ultimately good, and should be celebrated instead of discrediting active investors like Carl Icon.
David Waugh
David Waugh joined AIER in 2020 and currently serves as managing editor. He has previously worked as a partner in S&P Global Market Intelligence.
David is a graduate of Hampden-Sydney College where he received a BA in Economics. While in Hampden-Sydney, he was a Senior Fellow at the Center for the Study of Political Economy and served as a teaching assistant in the Department of Economics. He is a Don Lavoie Fellow at the Mercatus Center at George Mason University.