For years, Carl Icahn has invested in companies and then publicly harangued their managers for not doing more to boost the value of their shares.
Now, Mr. Icahn finds himself the target of investor complaint. A hedge fund is alleging that Mr. Icahn -- as director and majority owner of XO Holdings Inc. -- hurt shareholders by snubbing three approaches to acquire the struggling telecommunications company that could have boosted the stock, according to a recently unsealed lawsuit.
In a suit filed in a New York state court, the hedge fund, R2 Investments LDC, which owns 8.8% of the Herndon, Va., company, says at least one of the bids was above the company's stock price at the time. Instead of pursuing them, Mr. Icahn opted to refinance XO's debt by purchasing $780 million of preferred stock.That paid off for Mr. Icahn, R2 alleges in the suit, because he could use the preferred stock to boost his stake in XO above 80%, enabling him to tap the company's previous losses for valuable offsets to taxes at his other businesses.
Meanwhile, XO's stock fell from around $1.27 a share at the time the first bid was made to just 28 cents last month, when Mr. Icahn lodged a bid to buy the whole company.
XO has moved to dismiss the complaint. Chief Executive Carl Grivner said it would have been "a waste of time" to pursue the bids for XO or its assets, because telecom bidders at the time "couldn't get financing." Stocks of comparable telecoms companies have suffered worse declines than XO's, he said.
In court papers, Mr. Icahn said XO directors had no obligation to pursue the bids under the legal doctrine of "business judgment," which gives boards discretion to pursue actions they think are in a company's best interest.
Securities lawyers say corporate executives don't have an absolute requirement to accept or disclose financial offers. But the position isn't one usually associated with Mr. Icahn, who has spent a lot of time urging executives at companies like Kerr-McGee Corp., Blockbuster Inc., and Time Warner Inc., to sell assets or step down to boost the value of shares.
Mr. Icahn "spends so much time advocating shareholder rights" at higher profile companies, but has taken steps to "harm shareholders" at XO, said Geoffrey Raynor, managing member of Q Investments LP, a $1.5 billion Fort Worth, Texas, family of hedge funds that includes XO plaintiff R2.
Mr. Icahn called the statement "ludicrous." In an interview, he said his $780 million preferred investment saved the company from the risk of insolvency at a time when "money was not available."
Mr. Icahn gained control of XO, a casualty of the popped technology bubble, after it sought bankruptcy protection in 2002. When XO emerged from bankruptcy proceedings in 2003, Mr. Icahn owned 83% of its stock and 85% of its bank debt. His stake fell below 80% when the company sold shares in a rights offering, and he now owns 53%.[Icahn Chart]
R2 successfully sued to block an effort by Mr. Icahn to buy XO's profitable wireline assets in late 2005, a deal it argued would have left the company only an unprofitable wireless business.
The fund was granted the right to discovery of XO's records last November by a judge who said, referring to the 2008 preferred-stock issue, that there was "a sufficient credible basis... there might have been wrongdoing or conduct that led to an unfair transaction."
The suit by R2 didn't identify the bidders it says Mr. Icahn snubbed. But people familiar with the matter say separate acquisition bids in the range of $1 billion for all or part of XO were submitted in March and June of 2008 by Paetec Holding Corp. and Zayo Group. A third bidder that couldn't be identified showed interest in an acquisition. The bids went nowhere, the suit says.
Paetec, a publicly traded Fairport, N.Y., communications-services company, and Zayo, a closely held Louisville, Colo., fiber-network service company, declined to comment.
Morgan Stanley, which had been retained by XO to explore financing alternatives, said in April 2008 that a $1 billion bid would be worth $2.25 a share, when XO's stock was trading at $1.27, the suit said. The bank recommended that the bids be explored so that XO directors could weigh their value against the financing alternatives, according to the suit and people familiar with the bidding.
XO's shares, which traded above $5 a share in 2007, fell from $1.70 in March 2008 to a low of 12 cents a share in late 2008. Last month Mr. Icahn offered to buy out XO's other shareholders for 55 cents a share.
