The Parasitic Activist Investor

In the period between August 2013 and January 2014 the billionaire investor and friend of Donald Trump, Carl Icahn, bought $3.6 billion worth of Apple shares. Over the course of the next several months Icahn coordinated with Apple’s other large shareholders to engage in a campaign to pressure the company and its CEO, Tim Cook, to use its large cash reserves and borrowing capacity to engage in a massive stock buyback program for the purpose of driving up Apple’s stock price and enriching the company’s shareholders.

Think you will find our latest letter to @tim_cook re $AAPL interesting: http://t.co/w6e9XvWptb

— Carl Icahn (@Carl_C_Icahn) May 18, 2015

Icahn's demands for stock buybacks were not always possible. Up until 1982, stock buybacks were ILLEGAL. They were, and still are, a means to manipulate share prices and boost earnings per share (EPS). Additionally, it is also a means of transferring tremendous wealth from large corporations to its shareholders tax free as the resulting increase in shareholder value is a non-taxable event until a shareholder decides to sell their stock at which point they would still pay the lesser capital gains tax. This market manipulation is great for CEO’s and Wall Street shareholders, but in the long run it is bad for their company, it is bad for their employees and it is bad for the overall economy. It is a very shallow and shortsighted way to increase the wealth of select few elite members of society while offering no benefits to the rest of us. The money spent on stock buybacks is a waste of resources that could otherwise go to investments in R&D which in the long run would make a company more competitive and profitable.

Tim Cook and Apple eventually caved to Icahn’s demands and engaged in a “capital return” program which, since it began, has totaled in the hundreds of billions of dollars. When Apple first announced it’s decision to engage in share buybacks, Carl Icahn made $237 million virtually overnight. At the end of his 32 month position in Apple, Icahn had extracted a total of $2 billion in profit.

The type of investors that engage in these nefarious practices go by a variety of names, 'activist investors', 'venture capitalists' or sometimes 'corporate raiders'. Whatever you want to call them, one thing is for sure, their activities are a drain on our economy. They extract value from our large institution while providing nothing in return. Icahn’s foray into Apple is a prime of example of the damage these investors do to our economy.

What did Icahn really do to earn $2 billion in profit? Icahn held Apple shares for 32 months. He never supplied the company with any capital. Apple raised a total of $90 million from their 1980 initial public offering. Those initial public shareholders had long ago sold off their shares. Icahn had nothing to do with designing, developing and marketing the iPod, iPhone or iPad. He had nothing to do with the funding or building of the factories needed to produce Apple’s products. Furthermore, Icahn’s ill-gotten gains from this and other corporate raiding investments are barely taxed. Therefore, Icahn has not paid anything close to a fair share of the tax needed to help build the colleges and universities that educate the engineers needed to design Apple’s products or the roads built to allow those engineers to commute to work or the airplanes needed to carry and deliver Apple products around the world.

How does this behavior, which has been made legal by our government, do anything to benefit our economy? That money extracted from Apple could have gone to the engineers and factory workers at Apple. It could have been reinvested in new technologies. It could have gone back into the education and university system where the bulk of Apple’s smart phone technology was designed and publicly funded (How Taxpayers and Government Built the iPhone). It shouldn’t go to a billionaire investor who has contributed nothing to this process other than engaging in useless arbitrage.

Activist investors, corporate raiders, venture capitalists like Carl Icahn have tricked our society into believing that they are a necessary and productive part of our economy. They are not. They are a drain on our society. It is time to rewrite the rules of our economy so that it benefits all of us and not just a few super wealthy investors.