Carl Icahn Bids for Dynegy: Proxy Fights Make Great Trades
My recommendation this month is a classic contrarian trade: high beta, low valuations and no love from investors.
— Yiannis Mostrous, Stocks on the Run
The great thing about the stock market is that there are so many completely different ways to make money. You can be a long-term value investor like Warren Buffett or Seth Klarman, but that requires the patience of Job and long hours of fundamental research. Alternatively, you can be a trader like Paul Tudor Jones, who watches the market on a day-to-day basis like a hawk, finding momentum situations and pouncing in and out of positions for quick profits.
Let’s face it: we’d all be traders rather than investors if we could do it successfully. Quick profits are a lot more fund and exhilarating than slow profits. The problem is that the potential for quick profits also means the potential for quick losses. Most of us can’t stomach frequent quick losses. Consequently, the key to trading success involves finding catalysts that make the odds of a winning trade much higher than those for a losing trade.
When researching growth-oriented companies I look for catalysts. There’s no point in buying or selling a stock that’s just going to trade sideways or follow the broader market in lockstep
Proxy Fights are a Stock Catalyst
One great catalyst that has worked for me in the past is a proxy fight. Proxy fights occur when large shareholders in a corporation disagree with the decisions being made by the corporation’s management and seek to replace members of the company’s board of directors so that better decisions will be made and the company’s stock will increase in value.
I wrote about this issue back in April with regard to Denny’s. On March 2nd, the casual restaurant chain came under assault by a group of investors seeking to add three of its cronies to the company’s board of directors. From March 1st, the day prior to when the proxy battle was announced, to March 30th, Denny’s stock price rose from $2.70 to $3.99, a 48% increase!
That’s the kind of huge gain traders can experience when they act fast to take advantage of proxy battle excitement. Acting fast applies to both buying and selling. In the case of Denny’s, management ended up winning the proxy fight and the stock subsequently crashed, so you need to get out of these trades just as fast as you get into them.
Dynegy is Up For Grabs
A more recent example of a proxy-fight-induced trading opportunity involves the wholesale power generator, Dynegy (NYSE: DYN). Up through the beginning of August, the stock had experienced a steady decline, trading for only $2.76 a share on August 12th. Then on August 13th, the company announced that it had agreed to be acquired by buyout firm Blackstone Group (NYSE: BX) for $4.50 per share. The stock shot up 62% that day and closed at $4.53, above Blackstone’s offer price. Whenever a stock closes above an offer price, it signals that investors believe the offer will be raised. In the case of Dynegy, the offer has been raised. Yesterday (Dec. 15th), Carl Icahn’s buyout firm Icahn Enterprises (NYSE: IEP), upped the ante to $5.50 per share, so any trader who bought Dynegy after the August 13th announcement is up more than 21% in four months.
The catalyst for this higher offer was a proxy fight. On October 21st, Seneca Capital, which owned 9.3% of Dynegy’s shares, filed a statement with the SEC voicing its opposition to Blackstone’s $4.50 offer, saying it was grossly inadequate and accusing Dynegy’s board of a conflict of interest. On November 12, Carl Icahn, who had accumulated a 12.9% stake in Dynegy, entered the battle by offering Dynegy a $2 billion loan if shareholders voted down the Blackstone offer at the special shareholders’ meeting on November 17th.
On November 16th, the day before the shareholders’ meeting, Blackstone upped its offer to $5 per share, completely reversing course from its statement a day earlier (Nov. 15th) that it wouldn’t raise its bid. On November 23rd, after Dynegy’s management delayed the shareholder vote by a week, shareholders voted down Blackstone’s $5 offer. Icahn’s $5.50 offer then followed yesterday (Dec. 15th).
Will Blackstone come back with a higher offer? Based on a CNBC interview with Blackstone CEO Steve Schwarzman this morning (Dec. 16th), the answer is no, but Blackstone has changed its mind before. Traders have to decide whether to hold on for further gains or take profits now.
Never Buy What Icahn Controls
One thing is for sure, if Icahn actually acquires Dynegy, it’s time to sell. As Lionsgate Entertainment (NYSE: LGF) demonstrated recently in a letter to shareholders, Icahn has “a frightening record of destroying value:”
Mr. Icahn likes to brag about his fund making money for his investors, but he typically does not make money for shareholders of companies on which he or his representatives have secured board representation.
Over the past 10 years, if you invested a dollar in the companies where Mr. Icahn or his representatives have secured board representation, outside the biopharmaceutical sector, and sold after they left the board, you would only have EIGHTEEN CENTS left of that dollar (based on median performance) – a shocking decline in value of 82 percent.
Icahn’s poor performance record was confirmed by Institutional Magazine. And, based on my article Non-Energy MLPs: Just Say No, you shouldn’t be buying Blackstone Group or Icahn Enterprises either. Good traders take advantage of the ruckus that these financial MLPs stir up, but don’t invest in the buyout firms themselves.
Buy Stocks with Catalysts with Stocks on the Run!
Proxy contests are a type of catalyst that can signal future stock price appreciation. If you are looking for a short-term trading service that can spice up your investment returns with some quick winners in three to nine months’ time, Stocks on the Run is just what the doctor ordered.
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