Why Carl Icahn Cannot Succeed in AIG Activism

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It seems that no company is too big for Carl Icahn to try to influence in an effort to unlock value. American International Group Inc. (NYSE: AIG) is now Icahn’s latest public target, and its shares have gained 3% on the news. There is just one problem here. AIG might not be able to do what Icahn wants it to do, perhaps even if management decided that Icahn’s opinion is correct. Before you think this may be an Icahn bash, guess again. Icahn is absolutely right here in this particular instance.

Icahn issued a letter to AIG, noting that the company is too big to succeed. He points out that AIG consistently trades at a substantial discount to book value, and he even used his hallmark “no-brainer” explanation that splitting up AIG will greatly enhance shareholder value. The billionaire and activist investor wants AIG to pursue tax-free separations of its life and mortgage insurance subsidiaries to create three independent public companies, and he is urging a much-needed cost-control program.

Icahn would be right on these points. The problem is that busting up an AIG is probably far more difficult than it sounds. Icahn’s point that each spinco unit would be small enough to escape the Systemically Important Financial Institution (SIFI) designation is probably true. Two other companies that wanted out from such regulation have taken quite a long time to effect that.

Where Icahn’s plan may run into trouble is in the same effort that General Electric Co. (NYSE: GE) has run into. GE has been trying to get out from under its SIFI designation for some time. It turns out that once deemed a SIFI company, the regulators just don’t let it off the hook and getting out from under that takes a lot of effort and time. The reality is that the regulatory machine likes to regulate, and (without trying to sound too political) the current regime’s regulatory bodies really enjoy their control and oversight.

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Now let’s consider another financial giant. Insurance giant MetLife Inc. (NYSE: MET) was regulated like a bank holding company from 2001 to 2013, until it sold its deposits in 2013 (oh, and to GE for that matter). It took close to two years for MetLife to effect its wish of not being regulated as a bank holding company — and the deposit base sale was followed by an approval for the status change from the Federal Deposit Insurance Corp. and also from the Federal Reserve. Keep in mind MetLife’s deposit base of $6.4 billion, which would be paltry for a relative market cap if you compared that to its $56 billion market cap and $73 billion in revenues today.

Peter D. Hancock, AIG’s president and chief executive officer, issued an official response to Icahn:

AIG maintains an open dialogue with all our shareholders and welcomes their feedback and ideas. We have taken important and significant steps to reposition AIG by both simplifying and de-risking the company, and realizing attractive valuations from non-core asset sales. We remain on course and are determined to continue and accelerate these efforts. We look forward to sharing our progress and strategies at our regularly scheduled earnings call on Tuesday.

Hank Greenberg, AIG’s ousted founder, also might have something to say here.

Icahn is absolutely correct that a break up of AIG would unlock a lot of value. AIG has been paring off non-core assets for years now. The company almost certainly would be worth more broken up. The powers that be just might not want to let AIG out from under their spotlight. After all, a few tax-payer-funded regulators might lose their jobs.

AIG shares were last seen up 3% at $62.77 in late morning trading on Tuesday, giving it a market cap of $81 billion or so, which is more than $20 billion lower than its stated equity value. AIG has a consensus analyst price target of $67.74, and the highest analyst price target is up at $78.00. The shares have a 52-week range of $48.68 to $64.93.

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