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Icahn On The Receiving End For Once
A lawsuit filed several months ago by R2 Investments puts activist investor Carl Icahn on the defensive for once. The complaint: Icahn effectively took advantage of XO Communications' sizable NOL ($3.5 billion) "for his own use but for an inadequate price." As many investors will recall, "purchasing" NOLs was quite the play in the 2004-2005 time frame, and was deployed by many investors, Steel Partners being one of them with several acquisitions of bankrupt/distressed companies which were acquired not so much for tangible value but for the contribution of their NOLs to new shell corporations.
As Reuters reports, "The lawsuit said XO's board effectively gave Icahn stock worth $2
billion for $1 billion, and agreed to a preferred stock transaction
that diluted minority shareholdings."
Additionally, the suit said Icahn and the board ignored takeover bids
for XO that exceeded the telecommunication company's market price,
instead choosing to refinance the company's debt by issuing $780
million of preferred stock.
Icahn's response so far has been that he was acting as a beneficial owner whose sole intent was to save XO from insolvency:
"The complaint fails to adequately allege any breach of fiduciary
obligation or waste of a corporate asset," Icahn responded in a motion
to dismiss filed last month. "Even if the facts alleged in the
complaint are treated as true, (XO's) independent special committee
diligently negotiated and evaluated the transaction with the assistance
and advice of an independent financial adviser and independent counsel."
Some more on the background of the litigation, and Icahn's long-time involvement with XO communications:
XO of Herndon, Virginia, was a high-flying telecommunications
company that filed for bankruptcy in 2002 after the tech bubble burst.
Icahn bought XO debt and held more than 80 percent of the company when
it emerged from bankruptcy in 2003.
In 2005, Icahn proposed to acquire XO's profitable fiber optic unit
and its tax-loss benefits. R2 said it filed suit to block the sale and
Icahn backed down.
R2, in its complaint, listed a series of Icahn's actions over the
past five years that allegedly hurt the value of XO, including the
company's failure to refinance debt when credit markets were booming.
Icahn and XO also rebuffed three bidders, not identified in the
court documents. One suitor made an unsolicited $1 billion offer for
the whole company, followed by an expression of interest from another
party, R2 said.
Financial advisers told XO the $1 billion bid translated to $2.25 a
share, far exceeding the company's value at the time, according to the
lawsuit.
In court, Icahn now claims that R Squared's allegations are meritless and that the case is merely one of remorse.
Icahn, in his motion, said R2's claims are not valid and that the lawsuit was a case of remorse.
"Although (R2) was afforded the opportunity to purchase shares in the
offering," Icahn said, "it elected not to do so, choosing almost a year
later to instead file this spurious action, challenging the transaction
despite the fact that it resulted in a substantial infusion of cash and
capital for XO and eliminated XO's substantial debt."
What is notable here is not so much Icahn being served papers, contrary to his usually stance of being himself the one starting lawsuits, but rather that this is likely the preamble to numerous dog-eat-dog contests between hedge funds, each disclosing the other's dirty laundry and the schemes that were employed in the bubble to soak up as much value away from unwitting stakeholders, while sophisticated investors under the guise of "bail outs" would provide companies with breathing room for a few years, while extracting every possible dollar while weakened proxy protection (or none at all, if the controlling party was the one doing the "extracting") was at play. The resolution of this lawsuit, and potential settlement overtures will demonstrate just how relevant this appreach may end up being for other "offended" adversaries in comparable situations.
Below is the rebuttal submitted by Icahn in New York Supreme Court.
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I hope all the Blackstones of the world turn on each other and chaos ensues.
Amen. Love your pic BTW.
Things are about to get a lot worse for Ichan. He owns 17% of Guaranty Bank of Texas. They're running on fumes.
icahn owns 17% guaranty? wow. he's got some toast for that bank toaster huh?
Icahn is a joke - every company he touches turns into dust
yahoo being the prime evidence
R2 = Q Investments = some of the most sophisticated investors. Only nine investors. No marketing dept.
Nickel and dime stuff. If they can't steal at least $100 million per day they're amateurs.
Tyler - you have a double entry about this being a case of remorse towards the end. Thanks for the good post.