Tougher Than the Rest

By Janice Castro

Not so long ago, Carl Icahn looked like just another face in the rogue's gallery of corporate raiders, the types who bad-mouth managers but seldom seem to spend an honest day's work trying to renovate the companies they attack. Yet lo and behold, this widely feared raider is proving a breed apart from the other fast-buck operators. He rolls up his sleeves. Icahn, 51, is a quick learner who is imposing his no-frills ethic on some of the largest and most troubled U.S. corporations. Right now, the unflappable Icahn (estimated net worth: $700 million) is simultaneously juggling three daunting turnaround projects: the born-again TWA, the bankrupt Texaco and the resurgent USX. Icahn's demonstrated management know-how has made him perhaps the most credible of U.S. raiders, one whose spartan style of running a company is both inspiring and chilling for corporate America.

The stakes of Icahn's ventures keep getting larger and riskier. Last week Texaco, in which Icahn holds an interest of nearly 15%, said it lost an astronomical $4.4 billion last year, mainly because of its $3 billion payout to settle an epic takeover dispute with Pennzoil. Yet Texaco's loss might have been far larger had it not agreed to a compromise settlement of Pennzoil's $10.3 billion claim -- a break in the stalemate that Icahn helped bring about. Now Icahn is locked in a struggle with Texaco's management over how to restructure the company and bring it back from bankruptcy. Observes Paul Tierney, a founder of Coniston Partners, a New York City takeover firm: "When Carl goes after something, you can be pretty certain he'll pursue it to the death."

One room in Icahn's midtown Manhattan offices, decorated with framed stock certificates of the companies he has profitably raided, testifies to his conquests. Among the hunter's trophies: American Can, Simplicity Pattern, Hammermill Paper and Marshall Field. It is a display that would make many of his corporate victims cringe, especially the many who lost their jobs when companies were restructured as a result. Yet Icahn's headquarters is no temple to fast money, like the vaulted office of the reptilian Gordon Gekko in the movie Wall Street. Instead, it serves as a model for the unglamorous way he thinks business should be conducted. The only frill in his office is a Persian rug. Icahn manages his frenetic investment ventures with a staff of just eight, who scurry about their nondescript cluster of offices with no pretensions of power, eat lunch at their desks and do not bother to use intercoms. Says Office Manager Gail Golden: "We holler back and forth."

Just as unstuffy is Icahn's partner, Alfred Kingsley, a burly analytical wizard whose tiny office is buried in financial documents. "I know exactly where everything is -- unless somebody moves the paper. Then there'll be a crisis." Somehow Icahn's operation remains efficient despite the increasingly complicated latticework of his investments. Icahn raises money through an array of partnerships bearing such names as Aero Limited, Crane, Pelican and Condor. He changes the titles frequently so that his competitors cannot easily follow his activities in the market. To play, new investors must kick in a minimum of $100 million. But as Icahn told TIME, "No matter how much money they give me to invest, I won't let them look over my shoulder."

Icahn's evolution from a raider to a manager began in 1984, when he took over St. Louis-based ACF, a leading U.S. producer and lessor of railroad cars. At ACF, which was suffering from steadily declining earnings, Icahn encountered a splendid example of the so-called corpocracy of entrenched executives that he had berated for years. The company was so disorganized that no one seemed to know exactly what function was being served by an entire finance division of 173 employees. When a follow-up study confirmed that the division wasn't doing much of anything, he unhesitatingly abolished it. By remorselessly shrinking the company bureaucracy and cutting other costs, Icahn in just three years has rocketed ACF's earnings from $500,000 to $27 million, at a time when the railcar industry has generally been unprofitable.

ACF was only a warm-up for a much bigger boardroom challenge. In 1985 Icahn won a bitter seven-month tug-of-war with Texas Air Chief Frank Lorenzo over TWA (1985 losses: $150 million). In the process, he passed up the chance to turn a quick $150 million profit on his $310 million investment. That forced Icahn to prove another of his maxims: executives with their own money invested in a company do a better job of running it.

Soon after he started, some 5,000 TWA flight attendants walked out, grounding nearly half the airline's flights. Critics described the burgeoning disaster as Icahn's "comeuppance." Icahn coolly hired replacement workers willing to start at salaries as low as $12,000, compared with the $35,000 average prestrike wage of their predecessors.

He slashed costs by $400 million, eliminated 24 unprofitable routes and added 31 moneymaking ones. He also took over Ozark Air Lines to bolster TWA's St. Louis hub and feed more domestic passengers to TWA's international route structure. Results: in 1987 TWA earned an unprecedented $240.3 million. Based on the carrier's increased cash flow, Chairman Icahn, who holds 76% of the shares, has more than doubled the value of his investment. "If I hadn't come along," he boasts, "the airline would have unquestionably gone bankrupt by now."

While he was still struggling to salvage TWA, Icahn decided in 1986 to launch an even more ambitious gambit, the takeover of giant USX (1987 sales: $14.8 billion). Kingsley proposed the idea one day when Icahn, suffering from vacation boredom, called from Palm Beach, Fla., and asked, "What do you like, Al?" But Icahn underestimated the stubborn and resourceful opposition of USX Chairman David Roderick. After spending nearly $650 million buying up 11.4% of the company's stock, Icahn gave up, unable to raise the $10.5 billion he would need to complete the takeover.

On the face of it, Icahn's attempt to capture USX was a failure. But instead of selling his shares and pocketing a raider's profit, the feisty investor decided to keep his USX stock. Reason: in the 15 months since Icahn turned to USX, Roderick has essentially launched the restructuring that Icahn wanted, selling off unprofitable assets, trimming costs and shrinking management. Last week the company reported 1987 earnings of $219 million. The shares that Icahn bought at about 21 in 1986 have now reached 30 3/4.

Even the USX foray pales in comparison with the size of Icahn's latest target: Texaco (1986 sales: $31.6 billion). Icahn began buying shares in the company when it declared bankruptcy last spring after failing to reach any settlement with Pennzoil, which had won a $10.3 billion judgment against Texaco in a Texas court. Icahn got his chance to help break the impasse in December, when Bankruptcy Judge Howard Schwartzberg ruled that Texaco's shareholders could strike their own deal with Pennzoil, with or without the approval of Texaco management. Before long, spurred in part by Icahn's repeated phone calls and meetings with Pennzoil officials and Texaco investors, the two sides agreed to the $3 billion settlement.

As Texaco's biggest shareholder, Icahn controls 14.8% of the nation's third largest oil firm (after Exxon and Mobil). Nevertheless, Texaco has blocked his attempts to play a direct role in planning the reorganization. The company's proposal, which Schwartzberg approved last week, must now be accepted by Texaco stockholders. Icahn says he may team up with other investors to acquire a larger stake in the firm, and may also attempt to put his own hand-picked directors on the Texaco board.

Despite his wealth, Icahn is not about to be distracted from the chase by a taste for rich people's toys. Says he: "Yachts and fleets of limousines and private airplanes don't appeal to me at all. I want a comfortable life. What's the point of all that hassle?" The only son of a New York City schoolteacher and a lawyer, Icahn was the first student from Far Rockaway High School in Queens to be accepted by Princeton, where he studied philosophy. His mother worried about his future when he dropped out of medical school.

Icahn divides his time between weekends with his family at their 20-room home north of New York City and weekdays at a Manhattan apartment, just a two- block walk from his office. The fearsome raider is so shy that he is sometimes reluctant to brush off virtual strangers who approach him in public. While the strain of managing so many ventures clearly shows in his face, Icahn professes no interest in slowing down. Referring to his efforts to topple what he calls "arrogant, incompetent managements," he says, "There is a great fulfillment that you can do something about it. Also, you can make money doing it. But don't underestimate the fun of it. You're playing the toughest game in the world."

With reporting by Raji Samghabadi/New York