Turning Up the Heat

By Daniel Kadlec

Want to know how Carl Icahn thinks? Icahn will tell you a story. He was at the Bellagio Hotel in Las Vegas a few months ago and played poker with professional gamblers. In a $40,000 game, he wound up as one of two players left in a hand of seven-card stud. Icahn had two pairs; his opponent was showing four to a straight. The pro tipped off Icahn that he had seen his cards and said that because Icahn was an amateur, he felt obliged to tell him so. The pro then bet the table max: $4,000. Icahn, who had been about to fold, announced to the table, "I learned a long time ago that in big business and big poker, there ain't no nice guys," and matched the bet. His two pairs prevailed.

The story says a lot about what Icahn's latest target, media giant Time Warner (which publishes TIME), is up against as the renowned Wall Street maverick pushes the company to boost its stock price, stalled at about $18. Icahn's prescription is strong (and expensive) medicine: a $20 billion stock buyback and the spin-off of its vast cable operations. Icahn, the Princeton University philosophy major from Queens, N.Y., who staked his earliest ventures with money he won playing poker in the Army, loves taking on the big boys. He won't be bluffed--and he often wins.

Icahn, 69, hasn't mellowed a bit since his corporate-raider days in the 1980s, when he made millions of dollars buying stock and forcing asset sales, stock buybacks and special dividends by the likes of Texaco and Phillips Petroleum. In the '90s, with notable exceptions like RJR Nabisco (in which he bought a stake and pushed the company to break up), he operated more quietly, in beaten-down areas of the bond market. But now he's back on the big stage rattling major corporations--and loving it.

In his latest adventures, Icahn owes a big assist to the $1 trillion hedge-fund industry, to which he is closely allied and which gives him financial heft he hasn't enjoyed since being backed by Michael Milken's junk bonds 20 years ago. And in the post-scandal age, yesterday's raider is today's shareholder activist. Icahn is playing that role to the hilt, lashing out at executive mismanagement and excess. In his view, corporate America is plagued by CEOs and boards compromised by cozy friendships and financial relationships--to the detriment of tough decision making and healthy share prices. Says Icahn: "Guys like me make management accountable."

It's not just talk. His coups this year alone include besting rival financier Wilbur Ross in a bidding war for textile firm WestPoint Stevens, forcing stock buybacks at energy firm Kerr-McGee and drug firm Mylan Laboratories, and (with a stunning 77% of the vote) landing three seats on the board of Blockbuster, the video chain.

In taking on Time Warner CEO Richard Parsons, with his company's vast array of media properties, including CNN, HBO, America Online, Warner Bros. and New Line Cinema, and a current market value of $85 billion, Icahn has chosen his biggest mark yet. Time Warner has been struggling since the disastrous merger in 2000 with AOL, which sent the company's share price plummeting. An Icahn-led group picked up 2.6% of the company, and "a boatload of hedge funds and other short-term players are sitting in the stock," said Patrick McGurn, special counsel at Institutional Shareholder Services, which advises on proxy fights. Yet so far, long-term investors aren't biting. Many credit Parsons for having already made progress in getting Time Warner's house in order. And after an uptick following the disclosure of Icahn's plan, the stock has barely budged, a sign that Wall Street thinks he'll have trouble getting what he wants.

For one thing, the company's size will make it difficult for Icahn, whom Forbes estimates is worth $8.5 billion, to get enough of a stake to force his will on management. And many investors note that Parsons is already looking at a stock buyback (although a more modest $5 billion) and plans to split off 16% of the cable division. What's more, Parsons has the Time Warner board in his corner. He has presented spin-off scenarios and, according to a Time Warner insider, "the board has concluded there's no magic bullet."

But if the battle has been gentlemanly so far--Parsons described a meeting between the two in Icahn's office in August as "frank and open" and Icahn called it "cordial"--Icahn is preparing to take off the gloves. He is drafting a letter detailing his concerns that may go out as early as this week. Backing off his initial position that Parsons' efforts have been "commendable," Icahn charged in an interview with TIME that Parsons sold the Warner music division too cheaply two years ago and decided too late to convert AOL to a free portal to get a bigger piece of the Internet ad business. "They have one of the best content companies in the world," Icahn said, "but it certainly hasn't shown up in the share price under Parsons."

Time Warner declined to answer those points but issued this statement last week: "We have in place a process through which we are carefully reviewing a range of options to increase the value of our company, including those proposed by Mr. Icahn and his group." Ross, who over the years has been both Icahn's ally and foe, predicts that "unless there's a negotiated settlement, it's inevitable that this will get ugly." Look no further than Blockbuster for an idea of how nasty it could get. Icahn bought a stake in the company last year, and after management resisted his calls for change, Icahn publicly derided the CEO for taking an excessive pay package with the company losing money and called his budget "a spending spree." The stock has continued to slide.

Turning up the heat on Time Warner has risks. It could alienate shareholders Icahn will need if, as promised, he aims for a seat on the board next year. "I think Parsons has done a very good job," says Henry Berghoef, partner at Harris Associates, which holds $1.3 billion of Time Warner stock. Others see Icahn's criticism of Time Warner as playing Monday-morning quarterback. "It's hard to pick a date and say this is the way things should have gone," says James Goss, media analyst at Barrington Research. "Things were evolving." Then, paying off debt was critical, and something had to go. Parsons chose the troubled music division. Still, says Larry Haverty, money manager at Gabelli Asset Management, the value of the division today is $2 billion higher than the $2.6 billion it was sold for. If the stock doesn't jump soon, other shareholders say they'll welcome Icahn's push.

Icahn deplores wasted opportunity--he even rents out his yacht when he's not using it. His companies have more than $400 million in property up for sale because he believes the real-estate market is a bubble. He donated $10 million for a stadium project in Queens, N.Y., then negotiated to draw out the payments. Battling entrenched corporate bigwigs was a central tenet in his raising $2.5 billion for his own hedge fund. "I'm not Robin Hood," Icahn says, "but it's great when you can make a lot of money by helping all shareholders." Some would say that's just cover for his brand of opportunism. For Parsons, it doesn't really matter. Carl Icahn isn't folding. --With reporting by Unmesh Kher, Daren Fonda and Jyoti Thottam/New York

With reporting by Unmesh Kher/New York, Daren Fonda/New York, Jyoti Thottam/New York