March 2014 – Testing

Once again, Holman Jenkins Jr. is defending
the bad guy, this time in “Tesla Seeks Loophole, Not a Revolution” (see here
for our previous beef with the Wall Street Journal op-ed page writer).

The “bad guy” Jenkins sticks up for in this
weekend’s op-ed is not an individual, however, but rather the system of
entrenched car dealers who have tried to shut out Tesla from selling its cars
direct to consumers, with no “franchisee” in between, in various states around
the country.

What’s wrong with selling cars direct? According to Jenkins, nothing, really. He agrees the dealers are only “protecting
their anticompetitive interests” by shutting down Tesla-owned outlets.

But the way Jenkins sees it, Tesla CEO Elon
Musk doesn’t really want to open up the system, he’s just “browbeating a few
states into carving out friendly exceptions for Tesla.”

What bugs him even more is that Tesla’s
electric-car buyers benefit from federal and state tax rebates, although if Jenkins
had ever spoken with an actual Tesla owner (which hasn’t seemed to cross his
mind) he would discover that none of them bought the car for the tax credits:
they bought it because it’s a great car that happens to recharge (and download
software upgrades) while they sleep, no gasoline required.

As often in Jenkins’ pieces, there is fuzzy
logic to his knee-jerk defense of the bad guy: in this case, he uses the fact that
GM has been selling direct in Brazil “for a decade” to make the case that what
Tesla is doing is somehow less-than-ethical—but it’s not fathomable the way
it’s written.

Go ahead, try to figure out how this fits:

His [Musk’s] bluster about a
politically-favored gasoline oligopoly resisting its doom rings even hollower
given that GM already has been practicing for a decade in Brazil the
direct-sales approach that Mr. Musk preaches. Everybody wins: Buyers are
willing to pay more for a car if they can get exactly the trim package they
want rather than settling for the closest available facsimile on a dealer’s
lot. Chopped out of everyone’s overhead is the enormous cost of maintaining a
wide dealer inventory.

But direct-sale may work better with an
entry-level car like the Chevy Celta that GM sells in Brazil or a hobbyist item
like Tesla peddles to dilettantes and early adopters. Once Tesla makes its hoped-for transition
from a niche business to a volume manufacturer, with mainstream customers who
expect to make serious demands on the product, even Mr. Musk has suggested a
franchise dealer network may be the way to go. If so, expect much of his
current rhetoric to disappear down the memory hole though he’s quite right on
the substance of his critique of dealer-protection laws.

If anything, the fact that GM sells direct in
Brazil should be enough to satisfy both Jenkins and the American powers-that-be
that selling cars direct will not end the world as we know it. But Jenkins doesn’t see it that way.

He’s sees Tesla as “a hobbyist item,” a toy
for rich people—hypocrites who depend on tax favors to show off on weekends.

But the Tesla is no “hobby.” In 2013, as Jenkins would know if he did a
little research, the Tesla Model S outsold its luxury class peers sold by
Mercedes, BMW, Lexus, Audi and Porsche.

And Elon
Musk is no hobbyist.

As, again, Jenkins would know if he did a little research, it was Elon Musk who, at the same time he was gearing up Tesla (and paying off the government’s
loan faster than his internal combustion engine counterparts), found the time
to create SpaceX, which has already accomplished something that a) nobody thought
possible and b) ought to appeal to Jenkins’ private sector instincts: he brought
the cost of launching satellites down by more than half, and helped NASA resupply
the space station in the process.

And he did it faster than any government-subsidized, Washington lobby-dependent Lockheed or Raytheon could have done it.

The revolution will not be broadcast on the
editorial pages of the Wall Street Journal if Holman Jenkins has anything to do
with it.

Jeff Matthews

Author “Secrets in Plain
Sight: Business and Investing Secrets of Warren Buffett”

(eBooks on Investing,
2013) $4.99 Kindle Version at
Amazon.com

The
content contained in this blog represents only the opinions of Mr.
Matthews. Mr. Matthews also acts as an
advisor and clients advised by Mr. Matthews may hold either long or short
positions in securities of various companies discussed in the blog based upon
Mr. Matthews’ recommendations. This
commentary in no way constitutes investment advice, and should never be relied
on in making an investment decision, ever.
Also, this blog is not a solicitation of business by Mr. Matthews: all
inquiries will be ignored. And if you think
Mr. Matthews is kidding about that, he is not.
The content herein is intended solely for the entertainment of the
reader, and the author.

Carl Icahn is—and he likes to be told this—a great
investor.

Billions of dollars of value—literally, billions—have
materialized not just in Carl’s own pocket and those of his fellow investors in
Icahn Enterprises L.P., but also in the Charles Schwab and Fidelity Investment
accounts of investors across America, thanks to Carl’s prodding, poking and
pushing around of companies that show up on his value screen.

They can be great companies with enormous cash
piles and technology smarts such as Apple, which Wall Street suddenly worries
will become a has-been like, say, Motorola; and they can be once-great
companies like Motorola itself.

And they can be companies like eBay that are still
growing, still generating new users every day, and still throwing off cash—both
from its famous online auction business (the “eBay” side of the company), and
from its less famous, behind-the-scenes payments business (the “PayPal” side of
the company)—but where splitting up those businesses might put even more money
in Carl’s pockets.

Carl got into eBay the way he often gets into
his targets: buying options on eBay stock “in size,” as traders say, late last
year. He now controls, we are told, 2.2%
of the company.

And small though that position is, Carl is doing
what he always does when he buys into a target: he is whining. Big time.
In letters, in tweets and on CNBC.

More than that: he is attacking the behavior
of not only eBay’s CEO, John Donahoe—the man who engineered the turnaround of a
company that many on Wall Street had left for dead at the hand of Amazon.com years
ago—but of Donahoe’s fellow eBay board members, including Marc Andreessen, the
genius who helped launch Netscape, Scott Cook, the genius who created Quicken,
and Pierre Omidyar, the genius who created eBay. Oh, and Fred Anderson, the genius who helped
save Apple during its own dark days…

Now, the average outsider might think eBay
shareholders around the world are overjoyed at Carl’s sudden attention to their
company. After all, the stock is up
about 9% since his investment became public—thereby “creating value for
shareholders,” as Wall Street types like to say.

And Carl himself sites an investor survey
conducted by “Bernstein Research” confirming that “a majority of eBay
shareholders responding to the survey” are on his side when it comes to ridding
eBay of what he depicts as a corrupt, self-dealing, Machiavellian board.

After years of being lost in the wilderness,
it seems, eBay shareholders are on their way to the Promised Land thanks to one
of the truly great value-creators of our time.

Now, Carl did not disclose the sample size of eBay shareholders that “Bernstein Research” surveyed, but we can say with certainty that it was
not 100%: nobody called here.

Furthermore, a 9% jump in a few weeks—based on
the antics of a short-term shake-up artist—is actually small change to eBay
shareholders who bought into eBay after John Donahoe became CEO of the company following
years of degradation in the eBay auction platform, market share losses and
investment underperformance bequeathed by Donahoe’s predecessor.

Indeed, those investors who saw the value in
eBay after Donahoe began to roll up his sleeves and get to work from the
inside—many years before Carl decided it looked cheap enough to buy on the
outside—were able to acquire one of the world’s most profitable and growing internet
franchises at a mere 13-times forward earnings (and not “adjusted” earnings,
either: 13-times just plain net after-tax earnings) and less than 10-times
actual, real, cash flow.

Even better: as things turned out, the patient
shareholder who bought eBay back then was paying less than 8-times the earnings
eBay would deliver by 2013, well after Donahoe’s turnaround had begun to take
effect.

You can’t buy a bankrupt steel company for 8-times
earnings in today’s market, what with all the money flying around, let alone a
highly profitable, growing, global business.

So life has been good for those eBay
shareholders who trusted their cash to John Donahoe way back when, before Carl
decided the company was a laggard and needed his magic touch.

And those same shareholders might be forgiven
if they do not trust Carl’s sudden and belated interest in their company,
because they know his magic touch comes in the form of what Stephen Stills once
called “the fisted glove.”

Carl, you see, has a chip on his
shoulder. Maybe even a chip on both
shoulders.

He doesn’t like the frat-boy,
silver-spoon-type college grads who move up the corporate ranks simply because
they are likeable, friendly guys who happen to know the right people.

It’s just his thing. Carl does not like the corporate
clubhouse.

And that’s understandable: his first attempt to
infiltrate the corporate clubhouse in a big way—Trans World Airlines—ended
badly, for pretty much everybody except Carl Icahn. You can read the gory details here, but the entire
4,100 word article might be best summed up by its third paragraph:

Ask any ex-staffer what went wrong with the
airline, and you’ll get one answer: Carl Icahn, the corporate raider who took
over TWA in 1985 and systematically stripped it of its assets.

So when Carl unleashes his fisted glove on a
company, they better be nice. Tim Cook at
Apple was nice: he listened to Carl, bought some stock back and had dinner with
the man. As a result, Carl tweeted friendly things
about Tim Cook, even boasting about having dinner with Tim, like—well, like a
frat boy boasting about having dinner with the College President.

John Donahoe, apparently, was not as nice to
Carl as Tim Cook, so Carl is mad.

Hence the torrent of abuse in letters, tweets
and on CNBC, all centered around accusations that one board member passed along
corporate secrets to other board members; that the other board members used those
secrets to compete against eBay; that eBay sold Skype at a lowball price to one
of those secret-abusing board members; and that the entire eBay board of directors
is a cesspool of bad corporate governance.

As is often the case with Carl, the evidence he
delivers to prove his points ranges from damning—particularly the sale of Skype
at what does look in hindsight like a fire-sale price to an investor group that
included the venture firm of an eBay board member—to downright amusing (he quotes
an “eloquent” web site columnist in one salvo, and a “prominent technology
writer” in another—like, who cares what they think?)

But as any investor who bought eBay stock
during the dark days, many years before Carl noticed it looked undervalued, would recall, Carl’s narrative of the Skype transaction is flat out wrong.

An eBay investor from those days would recall
that, for starters, 2009 was not an easy year to sell any business, let alone a
“dotcom” business. Lehman had collapsed seven
months before eBay announced plans to spin off Skype to shareholders, and the
world as we know it had very nearly ended.
Banks weren’t lending, investors weren’t buying, and money was
scarce.

Even the great Carl Icahn wasn’t buying eBay
stock, cheap as it was. Nor was he
interested in Skype, valuable as he now sees it to be, for that matter.

The same long-term investor would also
remember that eBay had written down the value of Skype to less than $2
billion—and yet managed to reach a deal that brought it $2 billion for only 70%
of Skype, keeping a 30% share of Skype for eBay’s shareholders. If the new owners managed to increase the
value of Skype, eBay shareholders would benefit.

The same investor would remember—vividly—the
huge snag that nearly brought the deal down after it was announced, when
Skype’s founders filed preliminary injunctions to prevent the sale. Knowing how IP battles can kill a technology
business, that investor would recall how the legal battle nearly scuttled the whole
thing.

Not to mention that thanks to the eBay board’s
decision to keep 30% of Skype for shareholers, the total price recognized by eBay after
it was later sold to Microsoft would amount to $4.75 billion, for a business
that eBay carried for less than $2 billion on its books at the time of the
initial sale eighteen months before.

Since Carl wasn’t, it seems, paying attention
to eBay back then, it’s understandable he doesn’t recall the history of the
Skype transactions, and why eBay shareholders at the time were happy to part
with the distraction of a business that didn’t fit with the core auction
business, or even the burgeoning PayPal payments business—at a price almost
double its purchase price and more than double its value on eBay’s books at the
time it was sold.

It’s also understandable that Carl—who as we
have seen likes to quote people, even random columnists, when it fits his
opinion—didn’t quote the Wall Street analyst who, at the time of the initial
sale of Skype in September 2009, said the price was “something of a surprise,”
being higher than the carrying value on eBay’s books.

“A 14X deal multiple on EBITDA,” the analyst
explained, “would seem to be a high multiple.”
Long-term investors recall that eBay’s stock was trading for less than
10X EBITDA at the time, so 14X seemed very
good.

Nor did Carl quote the September 9, 2009
American Banker reporting on the sale of Skype “to private investors for a higher-than-expected price [emphasis
added].”

None of those facts—the environment in which
the transaction was carried out, the value eBay’s board extracted by keeping a
piece of the action, and the general praise the deal received at the time—enters into Carl’s diatribe against eBay’s CEO and its directors, because those facts
would contradict his entire thesis.

We said at the start that Carl Icahn has—and
he will be the first to remind you of this—created a lot of value in his life.

Granted, the value he has created is not the
tangible, Steve Jobs-type of value that actually helps people get through the
day better, or faster, or easier, or less expensively than their parents did…the
way eBay board member Scott Cook—the ex-P&G brand manager who sat down at
his kitchen table and decided to create a product, Quicken—did.

And it isn’t the kind of value that opens an
entire new world…like that thing called the Internet, for which eBay board
member Marc Andreessen helped create one of the first browsers and changed
pretty much every life around the planet.

Nor is it the kind of value that eBay board
member Fred Anderson brought to Apple when, as CFO, he helped figure out how to
fund the business by outsourcing production to low-cost manufacturers—this was
back in the day when computer companies made
their own boxes, by gosh—thereby turning Apple into a cash flow machine
that would, one day, attract the attention of great investors like Carl Icahn,
who saw at $500 a share something in Apple he did not see at $14 a share, where
the stock was when Fred Anderson finally retired after transforming the way
technology companies were run.

And it isn’t the kind of value that Pierre Omidyar
brought to, literally, the entire world when he helped connect collectors,
small businesses and just plain folks around the world on a simple platform he
wrote himself and named eBay.

No, Carl doesn’t create “value” in the sense
of making life better for everyday people.
He creates money for his investors and for the shareholders of his
targets who go along for the ride, and for his fellow investors in Icahn
Enterprises LP.

Ah, and what is Icahn Enterprises L.P.?
Well, it is a limited partnership. A massively successful one, of course.

Like eBay, it is publicly traded—meaning anyone
can buy into it and hitch a ride with Carl on his quest for “underperforming”
public companies he can push around.

Like eBay, it reports quarterly and annual
results and holds quarterly conference calls with Wall Street analysts.

And, like eBay, Icahn Enterprises has a board
of directors and a chairman.

The board chairman’s name is familiar to the
world—maybe more familiar than Fred Anderson, Pierre Omidyar, Scott Cook and
Mark Andreessen combined: his name is Carl C. Icahn.

The rest of the board of Icahn Enterprises
L.P. is less familiar.

Of the six directors not named Carl
Icahn, there is a man who serves as “the Chief Operating Officer of Icahn
Capital,” was “Controller at Icahn Associates Holding LLC” among other jobs, and
“has been employed by Icahn Enterprises and its affiliates for 10 years.” He also serves on the boards of two companies
“indirectly controlled by Carl C. Icahn.”

There is another man who has “significant
business experience and a leadership role as a director in various companies
including certain of our [Icahn Enterprise L.P.] subsidiaries.”

There is yet another man who serves as a
director of “a company in which Mr. Icahn has an interest,” and who also serves
as director of “an externally managed, closed-end management investment
company”—which a corporate governance maven would be forgiven for wondering if
being a director of one investment company while on the board of an activist
limited partnership investment management firm like Icahn Enterprises L.P.
might not put him in the position of the kind of head-spinning
conflict-of-interest Carl Icahn claims the eBay board members have.

There is another man who “served in a variety
of executive positions at Lear Corporation” from “2003 until July 2009,” which
happens to be the same month Lear filed for bankruptcy, and who has—like the
others—been a director of entities “each indirectly controlled by Carl C. Icahn”
(in this case, six such entities.) And another man who has “served as a director and Chairman of the audit committee of several of our [Icahn Enterprises L.P.] operating segments…”

There is, finally, a man who has worked at
Icahn Enterprises L.P. since 2006, and has served on the boards of nine entities that “each are indirectly
controlled by Carl C. Icahn.”

No doubt they are, to a man, highly accomplished and excellent in their roles. But a corporate governance maven, reading those biographies and not knowing of Icahn Enterprise L.P. and its sterling track record, might
be reminded of Mr. Potter’s comment on the Bailey Building & Loan’s sorry corporate governance practices in It’s a Wonderful Life: “You see, if you shoot pool with
some employee here, you can come and borrow money.”

Now, any shareholder of eBay would certainly be
forgiven for remembering what Carl Icahn did with the once-proud Trans World
Airlines and shuddering at the prospect of him getting his hands on the steering
wheel at eBay.

And certainly
any shareholder of eBay ought to be forgiven if they look at that list of
directors at Icahn Enterprises L.P. and scratch their heads, wondering “Who the
heck is this guy telling us how terribly conflicted our board of directors is?”

They may well wonder why it is that every
single director on the board of Icahn Enterprises L.P. who is not named Carl
Icahn has connections to various Carl Icahn-related enterprises, while Carl
himself—with a straight face—attacks their board for interconnections that he
believes would cause them to seemingly lose all sense of business judgment when
it comes to their duties as board members of a publicly traded entity.

But more than that, in reviewing that list of directors at
Icahn Enterprises L.P., they might very likely be reminded of what PIMCO CEO Bill Gross famously said
to his erstwhile business partner, Mohammed El-Erian, as reported in a recent
Wall Street Journal story about the behind-the-scenes breakup of the two men:

“I have
a 41-year track record of investing excellence,” Mr. Gross told Mr. Mohamed
El-Erian, according to the two witnesses. “What do you have?”

And comparing the eBay directors to the Icahn
Enterprises directors, eBay’s shareholders might well think:

“So we’ve got The Guy Who
Helped Pioneer the World Wide Web, the Guy Who Created the Online Auctions
Business, the Guy Who Helped Steve Jobs Save Apple, the Guy Who Dreamed Up
Quicken, and the Guy Who Turned Around eBay on our Board. Who’ve you got?”

Jeff Matthews, eBay
shareholder since November 11, 2009.

Author “Secrets in Plain
Sight: Business and Investing Secrets of Warren Buffett”

(eBooks on Investing,
2013) $4.99 Kindle Version at
Amazon.com

The
content contained in this blog represents only the opinions of Mr.
Matthews. Mr. Matthews also acts as an
advisor and clients advised by Mr. Matthews may hold either long or short
positions in securities of various companies discussed in the blog based upon
Mr. Matthews’ recommendations. This
commentary in no way constitutes investment advice, and should never be relied
on in making an investment decision, ever.
Also, this blog is not a solicitation of business by Mr. Matthews: all
inquiries will be ignored. And if you
think Mr. Matthews is kidding about that, he is not. The content herein is intended solely for the
entertainment of the reader, and the author.