Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 199

Lessons from a famous shareholder activist battle

In today’s world of proxy advisers, divestment campaigns and ‘two-strikes’ voting, shareholder activism has become mainstream. That wasn’t always the case, and Jeff Gramm’s Dear Chairman: Boardroom Battles and the Rise of Shareholder Activism provides a fascinating account of how this trend developed over the past century.

One of the most famous was Carl Icahn's pursuit of Phillips Petroleum, and even today it provides lessons for boards, management and shareholders.

During America's merger wave of the 1980s, 22,000 merger and acquisition (M&A) deals were brokered, but the small percentage of hostile acquisitions garnered the lion's share of attention. It was different to the previous waves because it was driven by the rise of Drexel Burnham and Michael Milken, who used the large, highly liquid niche market in junk bonds to fund hostile takeovers.

One such takeover was of oil company Phillips Petroleum (now a combination of ConocoPhillips and Phillips 66). In 1984 Phillips was trading in the mid-to-upper $30 range. After becoming the largest individual shareholder in Phillips Petroleum, corporate raider T. Boone Pickens launched a hostile tender offer to buy an additional 15% of the company at $60 per share. Phillips management counter-proposed with a complicated recapitalisation plan. It would pay Pickens $53 per share, entrench current management and commit Phillips to asset sales to fund a reduction in debt, increased dividends and an additional $1 billion in share repurchases.

The result? Management remained in place, Phillips’ share price fell 18% to the low $40s and Pickens walked away with $53 a share in cash and all expenses covered.

Enter Carl Icahn. His activism strategy centred on taking large positions in what he saw as undervalued businesses, seeking control then attempting to realise the valuation gap. One of his key motives for going after these companies was to highlight a lack of accountability at the board level.

Icahn knew that Pickens was an astute energy investor who was prepared to pay $60 per share. This, combined with an enraged minority shareholder base whose investment value had dropped to $45 per share, gave Icahn an opening, but he needed a lot of cash. Enter Milken, who raised $4 billion for Icahn and claimed he was 'highly confident' Drexel could raise more if needed.

Armed with the Drexel cash, on 4 February 1985, Icahn sent a letter to the Chairman and CEO of Phillips Petroleum, William C. Douce. Apart from announcing that he owned 5% of the company, making him one of the largest shareholders, he said the recapitalisation plan was 'grossly inadequate'. He said that if Phillips did not offer $55 each for the outstanding shares, he would use a leveraged buyout to buy Phillips for $55 a share: $27.50 in cash and $27.50 in subordinated notes. If Phillips were to reject the two options, Icahn would wage a proxy war to defeat the recapitalisation and make a hostile tender for the company.

Use of the poison pill

In an offensive / defensive two punch, Phillips promptly sued Icahn for violating proxy solicitation and anti-manipulation rules. At the same time, Phillips’ management sweetened the proposed recapitalisation to feature a new preferred stock dividend and a cash repurchase plan.

In a move that reverberates today, Phillips also introduced a 'rights plan' – one of the first versions of what we now know as a poison pill. If a buyer crossed the 30% ownership, other stockholders would convert each share into $62 worth of senior debt in Phillips paying 15% interest. The buyer would be left owning a dangerously over-leveraged company with $7 billion of short-term debt. As Gramm puts it: “…it served as a sharp repellent”.

Douce underestimated Icahn. The next day Icahn sent a letter announcing his intentions to initiate a tender offer for 25% of Phillips common stock. This, along with his 5% stake, would trigger the poison pill. On 13 February 1985 – less than three months after Pickens had put Phillips in play - Icahn commenced the tender for Phillips at $60 per share, contingent on shareholders voting down the recapitalisation plan. According to the New York Times, ‘Without using the word, Icahn said he would not accept greenmail, that is, would not sell his stock to the company unless the same offer was made to all shareholders.’ Shareholders believed Icahn and voted the plan down.

Less than a month later, Phillips announced it had lost the recapitalisation plan entirely. It settled with Icahn, eliminating the plan to put shares in the employee trust and covering Icahn for $25 million in expenses. Icahn walked away $50 million wealthier in just 10 weeks. He had avoided the poison pill by leaning on shareholders to accept his version of the truth.

How is the Phillips case relevant for investors today?

Pickens and Icahn realised that management’s actions were affecting Phillips’ market valuation, creating an anomaly that could be exploited. Pickens believed the anomaly was so large that he offered around a 55% premium for the stock. The same is true today. If the market doesn’t recognise the intrinsic value of a company, then a businessperson can - in the form of a corporate action like a takeover.

Although lawyers and company management can do their best to fend off what they may see as corporate raiders, poison pills and other protective measures may not be effective if the board doesn’t have the support of shareholders. If shareholders don’t feel that value is being maximised they won’t give the company their support.

Finally, corporate raiders like Icahn were helped by Milken but they were also assisted by a larger group of passive, institutional investors, who failed to act against management decisions that would leave shareholders worse off. With more money flowing into index and passive investment vehicles now, it means active, institutional managers need to monitor their investments in businesses more carefully. They should not simply outsource corporate governance issues to proxy advisers, but think about the calibre of the management team and board of directors steering the capital allocation decisions in the business. If there is a lack of accountability for bad decisions then institutional managers need to step up and question the board and management.

It is bad enough when active managers run portfolios that resemble the index. It is worse when they behave just as passively in matters of corporate governance.

 

Annabelle Symons is an Analyst at PM Capital. This article reflects the opinions of the author as at the time of writing and may change. PM Capital may now or in the future deal in any security mentioned. It is not investment advice.

  •   27 April 2017
  • 1
  •      
  •   
1 Comments
Mike
April 29, 2017

Interesting read @AnnabelleSymons.

I look forward to your next post

 

Leave a Comment:

RELATED ARTICLES

Why investment stewardship matters for long-term investors

Review exposes the blunders of a broken structure

Why gender diversity matters for investors

banner

Most viewed in recent weeks

Why spending more in early retirement can improve lifetime income

Conventional wisdom encourages retirees to preserve superannuation. But if those likely to qualify for the Age Pension later in life spend a little more today, it may deliver higher lifetime income and a more stable retirement.

Testamentary trusts have secured the CGT exemption

Treasury’s latest CGT reform draft delivers a win for testamentary trusts and deceased estates, exempting estate-derived gains from the 30% floor. However, questions on death and divorce rollovers remain unresolved.

Meg on SMSFs: What do we think about reversionary pensions these days?

Reversionary pensions have long been a staple of SMSF estate planning, but are they still the best option? Meg Heffron revisits a once-clear favourite and asks whether changing super rules have shifted the balance.

Is it time to bail on Australian stocks?

For generations, Australian investors have backed banks, miners and dividends. But has that loyalty come at a cost? A look at the numbers raises an uncomfortable question about where future returns will come from.

How does the 4% rule stack up?

The 4% rule has long been retirement's gold standard. But after a difficult period for investors, fresh analysis suggests a more conservative approach may significantly improve the chances of making savings last.

Testamentary trusts survived the trust tax. The drafting battle has just begun.

The fight over testamentary trusts looked settled. Then the draft legislation arrived. Hidden in a technical detail is a question that could force many families to rethink wills they thought were already future-proof.

Latest Updates

Planning

How the typical Australian Family could save $844,350 in taxes

The value of a testamentary trust is not determined by wealth alone. Depending on circumstances, it can reduce the tax burden on inherited income, create efficiencies and help build intergenerational wealth.

Superannuation

There's a reason why your super is locked up until your 60s

For decades, it seemed settled. Then one controversial idea reignited a debate that could reshape the financial future of millions. The real question isn’t who’s right or wrong, but whether a long-held assumption deserves another look.

Property

The housing slide could become a crash

House prices are sliding across Australia, yet the most dangerous ingredient for a housing crash is still missing. If job losses surge amid growing economic risks, today's correction could become a historic property downturn.

Retirement

Under-retiring: The greatest retirement risk in a generation

Two retirees. Similar savings. Completely different lives. New research from Challenger reveals why some Australians confidently spend in retirement while others hold back and the overlooked factor shaping retirement decisions.

Five risks to watch in markets

Things you may often hear are: a recession is around the corner, markets are overpriced, the AI sector is about to flop at any moment. It’s like the never-ending laundry pile that sits in my house, it never really disappears.

Investment strategies

Do you qualify as ‘rich’?

What does it mean to be 'rich'? For something so universally desired, it is surprisingly difficult to define. That ambiguity creates a challenge for investors and raises a bigger question about what financial success really looks like.

Investment strategies

If you’re worried about your bond portfolio, you’re missing the point

Most investors think they know what bonds are for. But when markets turn volatile, a surprising misunderstanding can lead to costly decisions. Here’s the overlooked lesson that could change how you view your portfolio.

Alliances

  • ASA-Logo-RGB-ActiveGreen-web.png

© 2026 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.