The Original Wolf of Wall Street Carl Icahn Returns

Carl Icahn is the richest man on Wall Street. He’s the most feared corporate raider in the world. He may also be the most entertaining financier on the planet. Having grown up in a family that resembled a darker version of Woody Allen’s multigenerational working-class Jewish clan in Radio Days, Icahn is prone to one-liners. (His oft-repeated riff on why he’s still working as hard as ever at age 77: “What should I do all day? Play shuffleboard?”) But his real talent is as a mimic. He does dead-on imitations of everyone from the Kansas oil tycoon who tried to give him the boot in his early days as an options dealer (“Cahhhl, I love yah, but I gotta leave yah–mah cousin’s in this business now”) to the aristocrat whom Icahn helped unload a block of Texaco shares when his cash was tight (“So I say, ‘Sir Robert, I hear you got some problems,’ and he says, ‘Quite correct, quite correct,'” Icahn mimics with a perfect lockjaw) to the trophy wife who complains about people on welfare while entertaining at her Hamptons megamansion to his own mother. When I ask him to do Apple CEO Tim Cook, though, he declines. “Nah, I can’t do Cook. I can only do crazies.”

Of course, some people say Cook is crazy to listen to Icahn, who has been trying to persuade him since August to give some of Apple’s $147 billion cash hoard back to investors in the form of a massive share buyback. Now Icahn is ratcheting up the pressure: he tells TIME that he filed a precatory proposal with Apple on Nov. 26, three days before the deadline for measures to be voted on at the company’s next annual shareholders meeting. His proposal, which calls for a stock buyback, would not be binding on the company’s management, and that’s typical for shareholder resolutions. But it is sure to be spellbinding to financial markets: a buyback would almost certainly push up the price of Apple’s stock–and increase the value of Icahn’s $2 billion in Apple holdings along with those of all the other Apple investors.

Icahn says he doesn’t consider his proposal an indictment of Cook, who has been at Apple’s helm since Steve Jobs died in 2011. “Tim Cook is doing a good job with the business,” Icahn tells Time. “I think he’s good at running the business whether he does what I want or not. But Apple is not a bank.”

Either way, Icahn’s proposal marks a new stage in the clash between one of the world’s most valuable and successful companies and its most formidable shareholder activist. (Icahn, worth $20.3 billion, just edges out George Soros as the top Wall Streeter on Forbes’ list of the richest people in America.) It’s a battle to which TIME has had a front-row seat over the past several weeks. As Icahn told me over dinner and a five-hour interview at his apartment–the same dining table where he’d sat with Cook in late September and proposed the buyback plan–nudging the management of a company like Apple is somewhat atypical for him. It’s a tactic more often associated with an attempt to restructure a weak firm, but Icahn is adamant that isn’t the case here. “I’m not against the management of this company,” he says. “They’ve just got too much money on their balance sheet.”

The Barbarians Return

Icahn’s move on apple comes near the end of a particularly successful year in which he has forced a change of direction at a number of other firms, including Chesapeake Energy and Herbalife, and just this month placed allies on the board of Talisman Energy, a Canadian oil and gas company. In a year when the Dow Jones industrial average is up 21%, Icahn’s firm is up 201.5%.

Nor is Icahn alone. He is part of an increasingly powerful wave of opinionated investors who call themselves shareholder activists–a clever rebranding for some of them, who used to be known as corporate raiders. In addition to Icahn, who was around the first time, today’s prominent activists include people like Bill Ackman, Daniel Loeb, David Einhorn, Ralph Whitworth and several others. They all have different styles and somewhat different methods. But the common thread is that they are taking on some of America’s most high-profile firms. In the past year or two alone, these activists have targeted companies including Dell, JCPenney, Herbalife and Hewlett-Packard.

The last time these corporate dramas played out so vividly was the Roaring ’80s. Everything was big then: balance sheets, shoulder pads, hair, egos. And the stock market seemed unstoppable until Black Monday delivered a comeuppance on Oct. 19, 1987, when the Dow plummeted 22%. The corporate raiders came to be known as “barbarians at the gate,” after the title of a book by Bryan Burrough and John Helyar chronicling the leveraged buyout of RJR Nabisco in 1988. That was a megadeal done with megadebt–the sort that came to epitomize the era.

Icahn was a major figure in that “Greed is good” scene, embarking on hostile takeovers of firms like aging airline TWA (whose assets he sold off piecemeal to pay for the deal) and demanding asset sales at Texaco, where he owned a major stake (he pushed for billions’ worth of dividend payments and share buybacks).

While a lot of it was simply about making money–which Icahn freely admits is his major motivation in life–the barbarians of the ’80s were inadvertently telling us something important about the excesses within corporate America and the economy as a whole. Shifts in SEC rules had allowed dealmaking to take precedence over investing. Throughout the ’80s and the decades that followed, share buybacks proliferated, and corporate investments into research and development suffered.

Few in corporate America seemed to question these shifts. Sure, companies might be bought and sold and people would lose their jobs, but wasn’t that all part of capitalism’s creative power? Debt, in this context, wasn’t always considered a bad thing–if companies weren’t using cash and assets productively, why not lever up and give money back to investors? The tax code, which increasingly came to favor debt over equity thanks to the efforts of the financial lobby, only made such tactics more tantalizing.

Now the barbarians are back. Once again they have something important to say to those who will pay attention. There have been big shifts in corporate behavior since the ’08 crisis. Companies across the U.S. are stockpiling cash and avoiding big new investments that could help rev up the economy. Both trends are signs that businesses believe we are in a long-term “new normal” of 2% annual growth. And both are fueling the new proliferation of shareholder activism. Corporate profits are at record highs. But demand and income growth are flat, meaning those corporate earnings–and stock prices–can’t stay up forever. The activists don’t like the future they see.

“The economic landscape is clearly helping spur a lot of interest in activism,” says Anne Sheehan, the head of corporate governance for Calstrs, the California state teachers’ pension fund, which manages $176 billion and has begun partnering with activists on proposals to shift corporate strategies to improve earnings. It recently forced Timken, an Ohio steel and bearings maker whose founding family held a significant stake and had disproportionate board representation, to break itself up. “We have a strong interest in making sure companies perform better over the long haul,” Sheehan says.

The number of activist interventions against public companies has been rising for a couple of years. There were 204 in both 2011 and 2012, up 21% from 2010. This year, which may set a record, there were already 138 actions by the end of August, according to an October report on shareholder activism by Citigroup. Back in the ’80s, shareholder activism came mostly in the form of hostile mergers and acquisitions. This time around, the game has changed. Activists are looking less to buy out firms outright and are more likely to pursue share buybacks and board seats that would allow them greater control over corporate strategy. “If you could sit in on some of these board meetings, you’d be shocked,” says Icahn, who compares CEOs and boards to eating-club presidents and their slightly dumber buddies who make them look good. “You’ve got to have people that own the companies sitting on the boards to hold them accountable,” he says.

The targets have changed too. Rather than seeking out poor performers, activists are setting their sights on bigger, richer companies. The Citi report found that 57% of the activist campaigns waged against S&P 1500 companies in 2013 involved firms with outperforming share prices.

The big prize in the new era? The record amount of cash on the balance sheets of American firms: some $2 trillion held in this country and another $2 trillion offshore. In a slow-growth environment, firms have been reluctant to invest that money; you don’t need to build a big new factory if you’re not anticipating a big uptick in demand. But companies are also reluctant to repatriate offshore cash and pay U.S. corporate-tax rates, which are higher than the international average.

Activists like Icahn (and others, including Loeb and Einhorn) believe companies should take that cash and give it to investors in the form of buybacks and higher dividends. Beyond that, there’s a sense that many firms in areas like consumer goods and technology are trading at lower-than-desired multiples and could get a higher share price by doing spin-offs or shifting their corporate strategy. While Icahn is no techie–his son Brett brings in most of the technology deals and advises him on holdings like Apple and Netflix–he thinks there are still plenty of corporate business models that will continue to be disrupted by technology, from auto components to the movie industry. “Before the advent of all this stuff with Netflix and streaming, it was tough to put together a group of five smart guys and do a movie for a massive audience without a huge distribution network. Now you can,” Icahn says. “There’s a great opportunity for someone there.”

Right or wrong, it’s clear that the activists are gaining sway. Institutional investors like Calpers and Calstrs are pouring more money into hedge funds (which typically have a multimillion-dollar minimum buy-in). The amount of money managed specifically by activist funds has grown to $84 billion in the second quarter of 2013, up from $32 billion in 2008, in large part because pension funds, college endowments and other large institutions are getting behind them.

No wonder: their returns have outperformed the market for the past few years. As of June 30, activist hedge funds made an annualized return of nearly 20% since 2009, compared with 12% for the S&P 500. Icahn’s fund, Icahn Partners, is the granddaddy of them all. Before and after closing to outside investors in 2011, it had an annualized return of 27%. Now anyone with $132 can buy a share of IEP, Icahn’s public company, and invest with Carl. “The fact that these funds have done so well over the last few years is creating a chicken-and-egg cycle–more institutional money flows in, activists take more actions, and returns go up,” says Donna Dabney, executive director of the Conference Board’s governance center.

Plenty of buy-and-hold investors, like Warren Buffett, would say that several years of good returns is nothing–and that companies should be managed not for short-term profits but for shareholders who truly stick around for the long haul. Icahn has done that with a few of his investments–like industrial-cleaning company Philip Services, which he has held for more than a decade–but not many.

Others say that while Icahn himself is a success, the rebranding of “barbarians” to “shareholder activists” isn’t good for corporate America as a whole. As a recent Citigroup report notes, it’s a few big-company deals of the sort that Icahn does–the ones that really drive share prices up–that make activism look so good. “The large improvements are driven by a relative minority of activist efforts that result in outsized stock price gains,” explains the report, yet a majority of corporate-activist targets since 2009 have had negative returns within a year of the campaign.

Icahn defends his recent targeting of companies from Apple to Netflix to Motorola and says he plans to push not only for more buybacks but also for more board seats with target companies. Sometimes it doesn’t require a push. Three companies–Transocean, Talisman Energy and Nuance Communications–have recently invited Icahn to add directors to their board, perhaps thinking, as Icahn likes to say, that “peace is better than war.”

“Many businesses in this country are terribly run,” Icahn says. “While there are a number of good board members, you’ve got some board members making $400,000 a year that are actually counterproductive. They’re not going to go against their buddy [the CEO] who put them there.” Icahn believes his role as an activist is to shake up boards, improve governance and make corporate America accountable. Indeed, he believes that it is the cure for what ails America, both economically and socially. He blames “poor corporate governance for a growing disparity in income and slow growth” in the U.S. “If we don’t get better corporate governance, we’re going to lose our hegemony.”

Growing Up Icahn

In many ways, Icahn’s success is testimony to the U.S.’s unique place in the world. “I couldn’t have done what I do in any other country,” he says, referring to the path of a working-class kid from Queens to Princeton, then to Wall Street and a penthouse duplex at 53rd Street and Fifth Avenue, in which he and his second wife and former assistant Gail Golden live amid corporate-raider chic–all marble and red-and-gold curtains, with the requisite Impressionist paintings and a power view of the GE building. This is where Icahn does much of his wheeling and dealing as a maid stands by with double martinis and a private chef serves salmon canapés and a slightly better version of the sort of dinner you’d find nearby at the St. Regis.

“My dining room is the best place to have dinner in the city,” he says, recounting deals that were cut there, from the revamping of health-food firm Hain Celestial (whose stock price has quadrupled since Icahn took over) to the splitting of Motorola (which made him nearly $1 billion). “It’s quiet, and you can really talk.”

And we do. While Icahn is a terror if you are on the wrong side of a deal with him, he can be a pleasure over cocktails, a natural-born storyteller with a disarming tendency not to take himself too seriously. (No rich guy turned philosopher, à la Soros or Ray Dalio, is he.) He tells me about his tough childhood in Queens, with his cantor father and schoolteacher mother, who were both boastful (to friends) and critical (to him) of their unusually bright only son. Icahn says his father, who “never spent a dime,” promised to pay his way into the Ivy League, but when he was accepted at Princeton, his dad balked at paying his room and board. “I said, ‘How am I going to eat?’ and they said, ‘That’s your problem.'”

So Icahn took a job as a cabana boy at a Long Island beach club and learned to play cards with patrons to win his college money. “I get three books on poker, and in one week I read them, all these books with numbers,” says Icahn, who is notoriously good at math. “Pretty soon, I know poker 10 times better than the best of them.”

Icahn had “smart genes,” says his longtime friend Ira Ellenthal, a publishing executive who grew up in the same neighborhood and later shared an apartment and double-dated with Icahn during his early days in Manhattan. “I don’t think he had the happiest childhood, though.” Back then, quips Icahn, “smart Jewish kids became doctors, and if you weren’t that bright, you were a lawyer.” When he graduated from Princeton, he started medical school. His father, in typical form, thought it was a good move, since Carl “had no real talent” for anything else. But he soon dropped out and began a career on Wall Street, at Dreyfus, where he put his mathematical skills to good use trading stocks and bonds and edging out the competition with complex options bets on whether assets would go up or down.

“I liked it because back then, it was kind of arcane,” says Icahn, who was and is a voracious reader of financial information, like Buffett. Although Jack Dreyfus, the firm’s leader, saw a bright future there for the young trader, Icahn always saw himself as a “lone wolf” and eventually started his own firm, making and losing many fortunes before becoming the Wall Street legend that he is now.

I ask him if his father ever acknowledged what a success he’d become. Icahn nods, sips his second martini and tells a story of how his dad, who knew he did complex arbitrage deals, came to him a few years before he died with a yellow pad and pencil. He pushed them across the table and said, “Show me what you do, son. Show me how you do it.” Icahn tears up. “I said, ‘You finally admit it, huh?’ And he said, ‘Yes.’ He wasn’t a demonstrative man, but he came over and hugged me.”

Icahn’s glee, then and now, at bringing down corporate fat cats is partly the legacy of his father, a socialist with conflicted beliefs (he was an atheist cantor) and thwarted ambitions who dreamed big (he wanted to be an opera star at the Met) but achieved little. “I think I inherited from my father a certain sense of outrage about people who believe themselves to be entitled,” says Icahn. “He was always ranting and raving about them.” It rubbed off on his son, who says he “never wanted to be Establishment” and professes any number of economic and political opinions that would please the left. He thinks, for example, that the Tea Party obsession with the deficit is overblown. He thinks that Fed chairman Ben Bernanke has done a great job and that President Obama is right to worry about inequality and stagnant wages for the lower and middle classes. (Icahn, historically a conservative, says he’s disenchanted with “dumb” Republican gaffes like Mitt Romney’s “47%” comment and didn’t vote in 2012.) He thinks the 1% are taking home too much of the country’s income. “Most of these guys don’t earn what they make.”

The Chutzpah Factor

By this point it should be clear that Icahn doesn’t lack for confidence. But he is now embarking on what may be his biggest test yet. In squaring off against Apple, he is picking a fight–however gently and carefully–that is very different from the battles where he made his corporate-raider bones. Those typically pitted Icahn against companies with cancers lurking somewhere within, weakened in some way and vulnerable to–even in need of–an assertive investor. Apple, though, is an opponent practically unique in the annals of American capitalism. It is literally the world’s most valuable company (even if a bad day in the stock market sometimes flips that honor temporarily back to the No. 2, ExxonMobil). More than that, though, Apple has a halo that few companies in history can match. Look around our smartphone-saturated, cloud-enabled and thoroughly digital world: Apple, many would argue, built the future.

How much chutzpah does it take to tell that company it’s doing it wrong? Even Icahn may not have enough–which is why he appears to be approaching Project Apple with unusual (for him, at least) diplomacy. He chooses his words about Cook with care and takes pains to show respect for the company and its management. Icahn says his most recent conversation with Cook was a 20-minute phone call on Nov. 21–which Cook’s assistant initially tried to schedule at 5 a.m. P.T. “That’s usually when I go to bed,” jokes Icahn, a notorious night owl. “This guy’s tougher to get than the President!” he adds. “A lot of people say Steve Jobs probably wouldn’t have talked to me, and maybe that’s true. But I think he [Cook] found our conversation interesting. He said, ‘Look, you’ve accomplished a lot, and we want to listen to you.'”

Icahn still has the option of withdrawing his proposal if he and Apple can come to terms. If they can’t, though, the situation has the potential to turn into an old-fashioned proxy fight (the term refers to the ballots cast by shareholders unable to attend the annual meeting), even if it is not a particularly hostile or aggressive one. In that scenario, the two sides will vie to persuade stockholders to vote their way. If a significant number of shares are cast for Icahn’s position, it would send a powerful signal to Cook and the Apple board. But even if some investors are antsy for Apple’s next big hit product and want to get their hands on more of Apple’s cash, it’s far from clear that they’ll be willing to second-guess such a world-class winner. Wall Street expects the company to earn $180 billion in revenue next year but would love to see another blockbuster on the order of the iPad.

Apple, for its part, is thinking hard about what to do with the cash hoard. In response to the Icahn precatory, Apple spokesman Steve Dowling told TIME, “Earlier this year we more than doubled our capital-return program to $100 billion, including the largest share-repurchase authorization in history. As part of our regular review process, we are once again actively seeking our shareholders’ input on our program, and as we said in October, the management team and our board are engaged in an ongoing discussion about it, which is thoughtful and deliberate. We will announce any changes to our current program in the first part of calendar 2014.”

Apple hasn’t exactly been standing still on buybacks. The company has already conducted a $17 billion bond offering to raise funds for a planned $60 billion share repurchase over three years. (The company decided to borrow the money rather than pay the hefty U.S. taxes required to bring some offshore cash back home.) And major institutional investors have supported the existing plans. “I don’t think we need a bigger share buyback,” says Anne Simpson, director for corporate governance at Calpers, the country’s largest pension fund.

For Icahn, though, it’s not enough. In a letter to the company dated Oct. 23 and posted on his new corporate-activism website, ShareholdersSquareTable.com he noted that the company trades at a discount to the S&P 500 index despite the fact that it’s a cash cow–Apple will likely generate about $51 billion of free cash next year.

And though he may not have invented the iPhone, Icahn has a pretty impressive track record himself. Anyone who invested in Icahn Enterprises in 2000 and sold at today’s price would have gotten a 1,850% return on equity, which comes to an annualized return of 23.8%–compared with 3.6% for the S&P 500. It’s a record that’s tough to beat–if indeed anyone has done so in that time period. Like many other investment oracles these days, Icahn believes the market is headed down: too much easy money has been propping up earnings for too long, and it can’t last forever. That’s why, he says, we need people like him to keep goosing corporate executives to do a better job. “This market will break. But I have no idea when … Nobody can tell you that.”