High on Poison Pills: Carl Icahn Thwarted by Family Dollar

Remy Merritt  |

Carl Icahn, chairman of Icahn Enterprises (IEP) and notorious “activist investor” whose corporate holdings include Clorox (CLX) and Apple (AAPL) , recently announced a 9.39 percent stake in shares of Family Dollar (FDO) . In response to Icahn’s move, Family Dollar adopted a shareholder right’s plan, colloquially referred to as a “poison pill.”

What Is a Poison Pill?

Developed in the early 1980s, a shareholder rights plan is strategy that the board of publicly traded companies employs when any one investor increases holdings beyond 10 percent. Once holdings surpass 10 percent, shareholders are given the option to sell their shares at a discounted rate.

The goal is to prevent the activist investor from making any drastic decisions on the direction of the company. Under protection of the poison pill, shareholders have the option of selling their stock at a greatly undervalued price, thus dropping the value of the company and making it less attractive as an investment for a quick profit turnaround.

Carl Icahn's Third Encounter with the Poison Pill

Icahn’s strategy as an activist investor is to claim a large stake in a company in order to direct future operations, often in the form of a merger or private buyout for quick profit. Icahn and other hedge fund moguls have sometimes faced criticism over carelessness for shareholders’ wellbeing, having been accusedof choosing short-term value extraction over the long-term health of a company. The billionaire investor has a history of being on the receiving end of three poison pill prescriptions over the past three years: Mentor Graphics in 2011, Netflix in 2012, and now Family Dollar in 2014.

Mentor Graphics (MENT) , a chip design firm operating out of Oregon, received news in 2010 that Icahn had acquired 14 percent of the company. By Feb. 22, 2011, Icahn offered Mentor Graphics $1.86 billion in cash for a buyout. Though his offer was rejected one month later, there were immediate effects on stock value:

Upon news of his purchase, stock prices jumped from $14.18 on Feb. 15 to just under $16 by early March. Icahn currently holds 14.3 percent of the graphics company, with shares valued at $21.69 apiece.

Icahn’s next target was Netflix (NFLX) .On October 31, 2012 he announced a purchase of 9.98 percent of the company’s stock. With this Halloween announcement came rumors of a buyout, and Icahn hinted he considered the streaming company attractive bait for acquisition by another tech giant. Under the threat of redirection from Icahn Enterprises, Netflix was quick to issue a warning to its shareholders and Icahn alike, threatening severe cuts in company value should Icahn accrue more than 0.02 percent in additional holdings. The result on shareholder optimism was reminiscent of his effect on Mentor Graphics, and the news of his purchase boosted stock value from $61.51 on Oct. 25 to $79.23 on Oct. 31:

Netflix abandoned its poison pill two years early in 2013 when Icahn sold half his stock for a 457 percent return.

Family Values: Family Dollar Sticks with its Shareholders

The latest in Icahn roadblocks is Family Dollar (FDO) . The company has adopted its own shareholder rights plan after Icahn disclosed his 9.39 percent stake onJune 6. Shares in Family Dollar are currently up 13.58 percent. It is expected that Icahn Enterprises are likely to push for a merger with Dollar General (DG) , which has simultaneously boosted shares of the potential partner by 8.97 percent. In a June 9 press release, Family Dollar disclosed that their adoption of a poison pill isn’t intended to prevent a buyer from making an offer, "but rather to allow the board adequate time to consider any and all alternatives."

Icahn’s purchase comes after news in April that Family Dollar would be closing 370 stores nationwide. Icahn tweeted on Friday afternoon that he expects to “continue our streak of value enhancement.” The billionaire investor’s history of value enhancement is mixed; Blockbuster crumbled on his watch, but many of his other holdings have thrived. It remains to be seen whether Family Dollar will ultimately accept Icahn’s offer in a rough period of layoffs and falling profits.

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