By Pete Gallo
Let it be said that 2011 has proven to be the best and worst of times for activist investors. There has been no shortage of stocks beaten down during the prolonged economic crunch. At the same time, macroeconomic uncertainties make turnarounds that much more challenging to engineer.
What’s an activist investor to do in raucously bearish markets? Just ask Carl Icahn. These days the famed activist seems a bit more like a traditional opportunistic buyer, grabbing hold at lows and then waiting for recovery.
Take his stake in the medical and health information provider WebMD. Since October, Icahn funds have added 2.5 million shares of WebMD, bringing holdings to 5.7 million shares, representing a 9.99 percent stake in the Nasdaq-traded company, based on its recent filings with the Securities and Exchange Commission.
There can be little doubt that weak share prices were the immediate draw for Icahn. WebMD shares, off a 52-week high of $58 set in May, had dipped to a low of $27 in October when Icahn made his move. Shares traded at $31.75 in late November, which put the overall value of Icahn’s exposure (through multiple funds) at roughly $180.7 million. Other investors were attracted by the lower-price entry point into the stock, including funds run by Soros Fund Management. Filings with the SEC show that Soros-affiliated funds own 3.4 million shares in WebMD.
Icahn may have seen a golden opportunity. For starters, WebMD isn’t the typical Internet business: It’s not a retailer, it boasts an affluent core clientele, and it possesses the largest commercial Rolodex of medical doctors on the planet. That fact is not lost on pharmaceutical, medical device and biotech companies who provide ample advertising dollars and sponsorship for WebMD conferences aimed at reaching that audience.
Whatever Icahn’s activist plans, if any, WebMD, which went public in 2005, seems to be on solid ground long-term. Regulatory filings show the company is sitting on more than $1 billion in cash and boasts low debt, suggesting WebMD is ready and able to fund growth through acquisitions. Revenues for its web portals, mainly from advertising, weighed in at $408 million for the nine months ending September 30, up from $366 million for the same period last year.
Clearly, these factors helped draw interest from funds run by the likes of Icahn and Soros. But the famous love-hate relationship between management of web companies and Wall Street seems to have surfaced as well. Apparently fearful of a hostile takeover bid or an activist-led management shake-up, WebMD rushed to shore up its defenses. Filings with the SEC show that on November 2, immediately following the buying spree by Icahn in late October, the company issued a statement to public stakeholders informing them of a change in shareholder rights. The company’s board of directors opted for a takeover defense based on issuance of a new preferred class of shares that would be matched 1-to-1 with common stock. These “rights” would become exercisable at a set price of $153 if any investor acquired in excess of 12 percent of WebMD’s common stock. The clause sunsets in one calendar year, according to the filing.
It remains to be seen whether Icahn funds will take this as a poison pill deterrence or as a sign that a hubristic management clearly overestimates WebMD’s book value. But since Icahn’s funds already own a nearly ten percent stake in the firm, management certainly got the activist’s attention. In the special November 2 letter to investors, company management said: “The Stockholder Rights Plan is designed to guard against inadequate or coercive takeovers and other tactics that might be used in an attempt to gain control of the Company without paying all stockholders a fair price for their shares.” Strong language? Lest that sound accusatory, management added: “The Stockholder Rights Plan will not prevent takeovers, but is designed to deter coercive takeover tactics and to encourage anyone attempting to acquire [WebMD] to first negotiate with the Board.”
In the meantime, Icahn has used his shareholder girth to make one suggestion. He wants WebMD management to put its arsenal of cash to immediate use. In a filing with the SEC on November 30, the activist called upon WebMD to buy back up to $1 billion in its own stock through a Dutch tender with prices capped at $36 per share. Such an auction might be a prelude to privatization. Or it may be the activist is throwing down a gauntlet so company management won’t keep WebMD’s substantial cash reserves idle. Management may have other ideas, but attracting even a prospective suitor in a bear market can never be a bad thing.