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Icahn's Overwrought Time Warner Assault

I've been a fan of Carl Icahn for a while, but I have to say I'm a bit disappointed in the stance he's taking on Time Warner (TWX). But let me be clear, I agree with Icahn on one critically important issue: Time Warner shares are a buy here.

First off, let's summarize what Icahn has been suggesting to Time Warner's management and the actions he's taken:

In August, he announced he was buying shares of Time Warner and had, alongside several hedge funds, accumulated 2.6% of the company. At the time, he specifically suggested that Time Warner increase its share-buyback program to $20 billion from $5 billion and completely spin off the cable division, as opposed to the 16% sliver that the company plans to spin off to the public.

A week later, he met with Dick Parsons, the CEO, and commended Parsons' stewardship on the company.

Then on Tuesday, Oct. 11, he sent a more aggressive letter to the company in which he disclosed that his group now owns 2.8% of Time Warner shares, and he then launched a host of criticisms:

  • He accused the company of selling Warner Music Group (WMG) at a fire-sale price.
  • He accused the company of selling its 50% stake in Comedy Central at a fire sale price.
  • He asked the (reasonable) question: If 12 of the 15 Time Warner directors voted for the disastrous AOL merger, why are many of these directors still on the board of Time Warner?
  • He criticized the building of Time Warner's new headquarters in Manhattan's Columbus Circle, calling it "lavish."

My response to this letter? Back off.

Immediately prior to Icahn's request that Parsons initiate a $20 billion buyback, Parsons had announced in early August that he would do a $5 billion buyback.

Carl, relax and let the company buy back the $5 billion. This is the first significant buyback Time Warner's enacted since the AOL merger. Between the time Parsons took over and this announcement, the overwhelming debt burden has been reduced by more than $13 billion. This has the same effect as a buyback in terms of lowering the enterprise value of the company. Icahn's request could have the effect of forcing Parsons to take on more debt when he just spent years reducing it.

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