Why Is Icahn Loading Up on Yahoo?

Dec 1, 2008

Black Friday is usually a day of bargain shopping. The gift giving comes later. This year, for Yahoo (YHOO) shareholders, a small present came a little early. Friday, in a SEC-required “insider” filing, Yahoo director and major shareholder Carl Icahn disclosed he’d acquired an additional 6,778,804 shares of Yahoo stock in three transactions between Monday and Wednesday. The news, which many took as a forward-looking omen, helped elevate Yahoo’s stock price.

Trying to look behind Icahn’s decision making, some are speculating his timing may indicate a new CEO announcement is on its way sooner than later. Others have posited different theories. Assuredly, one certainty is he’s not trading on actual knowledge of a CEO succession plan. Though he’d be in the know as a board member, trading on that kind of insider advantage is illegal.

So maybe, this is a sign Icahn believes liquidity will come sooner now that Jerry Yang has lost his grip? Or perhaps it could be a signal Icahn is hunkering down for the long haul?

Trying to get inside Icahn’s head has never been an easy task.

In his career as a corporate raider and as an activist investor, he’s made short term moves and long, wise choices and ill-timed ones. Looking long, in the late 90’s he did spend 4 years fighting to split RJR Nabisco. He’s also been into Blockbuster (BBI) since 2004 – not his best decision, so far.

With Yahoo, a lot of things are possible but I’d say one sure thing is that Icahn was doing a little bargain hunting a few days before the holiday sales started. Yahoo’s not pricey to own right now.

To be sure, Yahoo’s depreciation in value hasn’t come without reason. The fall owes to many things - the aftermath of Micro-hoo (MSFT) (and AOL (TWX)-Yahoo) merger speculation, Google’s (GOOG) abandonment of their search partnership, uncertain leadership, the greater economy and, especially, a distressed advertising market.

You can’t look past the fact that large ad spenders like “Big Auto” and global financial services companies have cut back (or in some cases no longer exist). The cuts have gone so deep, that, for example, GM just trimmed Tiger Woods out of their endorsement budget. Yahoo’s display advertising business has to be feeling some pressure.

On the other hand, all of Yahoo’s shortcomings notwithstanding, it has a great brand among consumers and massive audience traffic. There is plenty of cash on the books and virtually zero debt. At less than ten dollars a share, $9.7988, $9.9778 and $9.988 to be exact, Carl Icahn was buying at only a slight premium to book value. ($8.368 a share for the most recent quarterly data.) He was also committing just a small fraction of the money he already committed at a much higher premium to gather his first 68m shares.

Icahn’s principal Yahoo holdings came at much steeper prices, probably somewhere in the range of $23.89 to $27.91 a share (see below).

Not counting the 10k shares he received for his board appointment in August, or the options granted as part of the same compensation package ($19.80 strike price), Icahn’s near 6.8m share addition probably dropped his per share basis by between $1 and a $1.60 a share. (cost averaging based on the different purchase prices).

He’s still deeply under water on the investment but he’s seen the company’s innards as a board member. Buying now is as much an adjustment of his average share price as it a public statement he still believes in the vision.

Pricing The initial Buy-In
While the exact cash Carl Icahn parted with to grab his initial shares isn’t publicly known (Icahn wasn’t subject to Insider reporting before joining the board), the range is easy to zoom in on with a reasonable level of accuracy.

Securities laws require institutional investment managers, responsible for more than $100 million, to report their holdings in periodic regulatory filings. Carl Icahn and his investment company, Icahn Capital, are subject to these regulations. Based on the dates of the 13f filings, all of Icahn’s initial Yahoo purchases were made between March 31st and June 30th.

During that period, historical stock prices amount to an average share price of $26.2786. If Icahn’s timing was off and he bought only between the May to June period, it would have cost about a dollar more a share on average ($27.9108). If he made all of his purchases in June, he’d have saved a bit - the shares traded in a range of $22 to $24 in the later parts of June and had an average share price of $23.8857 over the month.

Run the range on the high and low averages and the expense was maybe $1,643,009,403 to $1,919,881,220 to acquire the initial sixty eight plus million shares (plus whatever transaction fees he may be paying).

Source: Seeking Alpha