Paper vs. Reality |
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I’ve been reading that Carl Icahn wants to work his financial chicanery on Apple. Now this is an interesting battle. Evil vs. Good. The Paper Economy vs. The Real Economy. Black vs. White. Wow. First of all, full disclosure: while I was at Y&R I was the management supervisor on the TWA account when Icahn owned the airline. I sat across his mahogany conference table from him many times (We used to say there was one less rain forest in Brazil for the mahogany he had in that conference room!). The facts were clear: Icahn wasn’t interested in running an airline or making it better, he saw it as an arbitrage opportunity (the physical assets of the airline were worth more than the company’s Wall Street valuation). Through my four years on the account, I observed as Icahn greenmailed and LBOed innocent companies like lambs led to slaughter (meetings with Icahn were like a circus, as we were presenting storyboards he would take calls and be making deals as he was choosing commercials – usually the cheapest!). I remember one deal where he was able to “greenmail” some poor company for $250 million.I asked myself, what’s wrong with this picture? So Icahn, a guy already worth hundreds of millions (now billions) gets a quarter of a billion to walk away after being a bully and what happens to the company? $250 million less to spend on R&D, real investment and expansion of plant and facilities. Okay, so here’s the very simple question: what’s better for the economy as a whole? A corporate raider getting another quarter of a billion or a company being able to invest in R&D and expansion?That one’s a no-brainer. Keynes used to make a distinction between the real economy and the paper economy. The real economy was people and companies working to provide goods and services which created value. The paper economy was Wall Street literally trading paper. He had a sarcastic disdain for Wall St, comparing the stock market to a “baby picture contest” and referring to it as (and I paraphrase), “one group of misinformed people trying to guess what another group of misinformed people are going to do.” (Note: despite his disdain, Keynes made a fortune in the market; perhaps because he understood exactly what he was dealing with). Unfortunately, it’s gotten even worse. In Keynes times, they didn’t have derivatives or derivatives of derivatives or synthetic derivatives as we do today. And we all saw what havoc a few greedy Wall Street rapscallions could wreck upon our economy by trading derivatives like poker chips. Now to Apple. Apple is a jewel in the economy. It is innovative, values creativity, and develops products that make peoples’ lives better, thereby creating real value. There’s a simple elegance to Apple’s products, combining the best of technology, design, innovation and ergonomics into one sweet package. Okay, so the company’s sitting on a stockpile of cash. Wasn’t the cash earned by its own abilities and good fortune? Icahn thinks some of the cash should be his (“Apple’s not a bank,” he pronounced). So what would happen if Apple gave Icahn hundreds of millions to walk away? Then Apple would have that much less to spend on doing what they do better than anyone else. In Icahn’s world, there’s no room for R&D, real capital investment and employee development. It’s all about more money for him. The economy’s a zero-sum game. Unfortunately, much of Wall Street is like that today. The paper economy rules over the real economy (just like it did in the crash of 2008/2009 bringing the economy – and most Americans – to its knees). Once someone asked Icahn why he was going to raid some company. His answer was simple: Because I can! Well, you know, thinking about it, my Acura RDX is probably worth more if disassembled for its parts than as a working automobile. Does that mean I should chop it up? (There’s a word for people who do that: thieves) In this week’s Time magazine article about Icahn and Apple, Icahn mentioned how he had a conversation with Apple CEO Tim Cook. As an aside, Icahn mentioned, “a lot of people say Steve Jobs probably wouldn’t have talked to me.” All I can say to that? A gigantic posthumous thank you to Steve Jobs. |
