Motley Fool Money - Icahn Gets His Way

Episode Date: June 12, 2023

Carl Icahn gets what he was after as Illumina’s CEO steps down but what does this mean for the company’s potential big acquisition? (00:21) Jason Moser and Deidre Woollard discuss: - If Illumina’s CEO’s exit will impact the company’s moves to acquire Grail. - Carl Icahn’s history of activist investing. - Thoma Bravo’s success in buying companies and repackaging them for sale. (14:37) Ricky Mulvey interviews Anjay Nagpal, host of the podcast “Brokers, Bagmen, and Moles” about the curious history of the Chicago Mercantile Exchange and its ramifications on today’s investing universe. Companies discussed: ILMN, IEP, NDAQ, MSFT, ATVI Host: Deidre Woollard Guests: Jason Moser, Ricky Mulvey, Anjay Nagpal Producer: Ricky Mulvey Engineer: Dan Boyd Learn more about your ad choices. Visit megaphone.fm/adchoices

Hi everyone, I'm Charlie Cox. Join us on Disney Plus as we talk with the cast and crew of Marvel Television's Daredevil Born Again. What haven't you gotten to do as Daredevil? Being the Avengers. Charlie and Vincent came to play. I get emotional when I think about it. One of the great finale of any episode we've ever done. We are going to play Truth or Daredevil.

What? Oh, boy. Fantastic. You guys go hard. Daredevil Born Again official podcast Tuesdays, and stream Season 2 of Marvel Television's Daredevil Born Again on Disney Plus. Elimina CEO steps down and private equity makes a big sale. Motley Fool Money starts now.

From Motley Fool Money, I'm Deidre Willard. I'm joined in studio by Motley Fool analyst Jason Moser. Hi, Jason. How you doing today? Hey, doing great. How are you? Doing good. Well, I feel like one of the time-honored PR techniques is you kind of sneak out news on a Sunday night.

We got one of those last night with the news that Aluminah's CEO, Francis DeSuzza, he stepped down. Aluminah, they're a biotech company. They're focused on genetic testing. DeSuzzi, he's kind of bent through it the last. a few months, really, he's been the subject of this activist attack from Carl Icon, which he outlasted over the Grail acquisition. Not the first time we've seen a CEO go through something like that and step down. Was this the case of him just outlasting that and then choosing his own moment to exit? I mean, it's possible. I mean, this has been quite the soap opera, though.

And, I mean, ultimately, you see what's going on here from the inception of this acquisition, kind of buying back this company that they spun off. It does seem like there's a a level of hubris that came with Mr. DeSouza that could have backfired on him. I mean, when you go through a deal like this and regulators' voice concerns and you go ahead through with the deal, you close everything, you kind of go against regulators' wishes, right? They just sort of thumb their nose at regulatory concerns there. I just don't feel like that's good. I don't feel like that's good for business, right?

It feels like you're not necessarily in the position to be making those calls. I mean, this is a big deal. It was an $8 billion-dollar acquisition, Aluminate. a $30 billion market cap. I mean, it was relatively large in the context of the business itself. And so maybe this was a matter of him choosing the right time to get out, but it sure does seem like the activism was not playing in his favor, right? I mean, this, again, I go back to that word hubris. It feels like there was a level of hubris involved with this decision that probably backfired on him. Could it have swayed

things had he just taken a little bit more of a conciliatory, tone or exercise some patience. Maybe. I don't know, but it does feel like the regulatory concerns were justified in this, potentially putting Illumina in a position where competitors really wouldn't have an opportunity to compete fairly with them. Yeah, and it was interesting to see immediately after the news came out, Icon went to Twitter. He talked about, you know, he was sort of declaring victory.

Then you had, Desuzza, he was on LinkedIn talking about how he still believes the Grail deal will go through. So definitely had that soap opera element to it. So let's talk about the grail deal. So this was what really had ICON so upset. It's this cancer detection test. It's the former subsidiary, as he mentioned. FTC said it was going to stifle competition, Illumina Appeal. That was still going on. Desuzza in that LinkedIn post, he was very much saying, you know, he still feels like this is good for the company, even though, of course, he knows Bongra has a say in that. What happens next? That's a good question. I mean, it does feel like there are some tones here, save the hubris, I guess. I would say it does feel like there's some tones here of Microsoft and Activision Blizzard, and then this has been going on for a while. And it's really tough to try to figure out exactly what the end game is or what's going to happen. But it does seem like the signs are pointing to where this is not happening, right? I don't know that Desoza stepping down makes any difference. I'm sure there's probably someone on the regulatory side that's maybe saying, I told you so. know, but I don't know that this is a matter of having a different CEO or different leadership

installed. Really, at the end of the day, this boils back. And you look at the criticisms that Mr. Icom lobbed up in regard to this deal. I mean, it was generally the feeling that they're overpaying, which they very well may have. I mean, valuation is somewhat subjective. But ultimately, this boils down to shareholders, right? I mean, this is something where it was felt that this is not a shareholder-friendly deal. This is not something that really plays into shareholders' favor. And so regardless, the CEO, I don't know that that really changes the dynamic of this deal. And ultimately, it does go to sort of the risks of growth via acquisition, right? I mean, Aluminah is, it's a company that's run into a little bit of headwinds there in regard to growth.

And so acquisition is one way you kind of get past that. In this case, it doesn't look like this acquisition is going to work. And so then you've got to go back to the drawing table and feel like, okay, well, what exactly are we going to do to spur that growth? I don't know that this deal is going to happen, and I don't think change in leadership makes a difference. Interesting. I want to sort of dive into that a little bit more of the idea of what happens when a deal like this, as you said, it's been going on for so long. Both companies highly engaged in it. Now, if they have to, if they go off in their different directions, you said, you know, maybe does Aluminah look for something else,

or do they try to grow without acquisition? And what does it mean for Grail? Yeah, well, I think that really depends on who fills Mr. Duce's role, right? I mean, new leadership will come in with new strategy. And so it is a little bit of a waiting name to see exactly who does fill that role. And that will dictate, I think, a lot of how Illumina is approaching these next few years. I mean, certainly, if they do look for additional acquisitions, they're going to have to be very thoughtful in regard to regulatory concerns there. Because it does feel like, I mean, not just in regard to Illumina, but it does feel,

feel like regulators are giving a lot of these deals a lot more scrutiny than they had been over the last several years. So maybe that is a little bit of a sort of a changing, changing of the narrative there going forward, not just for a limit, but for companies all over. Yeah, especially. Certainly, we've seen that in biotech as well with, I believe it was Amigen and Horizon. Let's talk a little bit about Carl Icon. He's such a fascinating figure to me. There was that HBO documentary about him. Recently, that Hindenberg short report that claimed, among other things, that Icon is kind of pumping up his dividend. He owns around 84% of the company. He doesn't take his dividend in cash, but it's got an attractive

dividend yield. Since that report, the stock has been down dramatically. He's a fighter. Is he fighting too many things at once? It's possible. I mean, I would say probably so. But I think he likes that. I think that he's doing what he really loves to do. He has a long activist history for sure, and always seems to be in the headlines. There's no doubt. This stuff, gets personal sometimes. And I think that's really the biggest risk. Beyond just spreading yourself too thin, which we see often with leadership, they kind of try to focus on doing too many things and they don't do anything really terribly well. I wouldn't necessarily put ICON in that position yet, but it does seem like some of this stuff gets a little bit personal for him. You go back

through the years, look at some of the battles that he and Bill Ackman have waged. I mean, it's difficult for that stuff not to get personal at some level because they just start lobbying a taxi, against each other and investing at the end of the day really is just one big disagreement, right? I mean, you'll get a buyer and a seller, and then both parties think they're right. But I think that speaks to the greater risk in investing, not just for someone like Bill Ackman or Carl Icon, but for us, right? I mean, emotions can be a real risk for investors, and it's important to be able to define ways to keep those emotions in check because they can make you make decisions that don't

necessarily take the long-term into view. Yeah, yeah. And he's very, he's very aggressive in his language, too, in the ways, in the presentations that he makes and things like that. So it always seems like he's got an extra grind. Probably a little bit of hubris there, too. I mean, I think there are a lot of good lessons that kind of come from. We often talk about the way we invest versus, like, some of these things you see

in the headlines. And these folks are playing a different game, right? We're not playing the same game. And so it is, maybe there is an attitude and any level of hubris that is required for, for, you know, what they're doing. But regardless, it can all lead to potentially bad decision making or at least some short-term focus decision-making, which oftentimes doesn't work out well. Yeah, it's true. Well, let's move on to some M&A news. We kind of get those on Mondays, too.

We've got NASDAQ acquiring ADENSA. So, Adenza, if you've never heard of it, a lot of it. a lot of people haven't heard of it. Deal for $10.5 million. So, Adenza, it's actually a mix of two companies that were acquired by Toma Bravo, which is a private equity firm. It's Calypso and Axiom SL. Both of them are regulatory, one of them, regulatory software, one for brokers.

It seems that one for sort of the more bankers' financial end. Tell us a little bit more about what this deal means. Yeah, you know, it's funny. We usually see this going the other way. The news is always that Toma Bravo is acquiring another one of our favorite software firms. I still remember the day they acquired L.A. May, and I was a little bit salty about that one. But yeah, this is just an interesting combination. I think you go back to, what was it, 2020? Bravo acquired Axiomsl. Then in 2021, or it was around that same time they had acquired Calypso,

but they ultimately, they merged Calypso and AxiMSL to become Adenza. and, you know, a DENSA software firm that helps manage trading and risk management and post-trade processing, along with technology that helps streamline reporting to regulators. I think that's an important dynamic to the business, because when you start bringing regulatory reporting, regulatory framework into the mix, that can become a little bit more of a competitive advantage, particularly in the world of finance. Again, it does feel like, while we normally see Bravo, making the acquisitions, it's always interesting to see this news when they're actually selling

something and realizing a bit of a return on their investment. Well, and it's interesting, too, because Toma Bravo, where they pick up around 15% of NASDAQ in the deal because it's a cash and stock deal. So that is absolutely significant as well. But really thinking about where NASDAQ is going, it seems to be in the middle of kind of a push. It's kind of becoming maybe a backend fintech provider. Is that necessary? for NASDAQ if it wants to expand as a company to kind of bring in these other aspects of a business? I think it's going to help. I mean, we talked earlier about just the risks of acquiring growth. But in this case, I think this is a nice, this is a complementary business.

When you look at NASDAQ before this deal, I mean, NASDAQ, it's a very transaction-centric business, and that comes with a level of expenses. And you can see that in their market platforms, which make up the lion's share of the revenue before the transaction expenses. but once you back out those transaction expenses, it becomes more on par with their capital access side of the business. So this is going to be something that helps sort of diversify them away from that exposure to just the transaction side of the business. Ultimately, I think that's a good thing.

It's just a matter of whether they can make this integration seamless. That always is a risk that comes with acquisitions, but generally speaking, it seems like it's a complementary merger here for these two. Well, Toma Bravo, they're sort of fascinating. because they've been really aggressive the last couple of years. They've, as you said, they've bought up some of the companies that we've liked. And they've also been doing this thing where they've been pairing up certain companies. So we see this with this one.

They did something similar with magnet forensics and gray shift. They're combining that into a new company. It's still private for now. But does this deal sort of shift that maybe Tomabrabo is now done with the acquiring and maybe starting to maybe start selling off companies? What do you think might be happening here? It's possible. But just given the nature of.

Bravo's business. I mean, this is kind of what they do, right? As a P-Firm, they have better than 75 portfolio companies today. They manage around $130 billion in assets. Because they specialize, they're so focused on this software side of the world. They have a level of expertise that they've really built throughout the years, and so they can see businesses that may make sense being together versus businesses, perhaps, that are separate. So you see them maybe making a couple of acquisitions, combining these businesses, and creating a little bit more of a value proposition, a bit more of an attractive asset. I mean, if you look at just the numbers, I mean, Bravo bought Calypso for around $3.7 billion. They bought Axiom for around $2 billion.

So you look at this acquisition today, they're selling for around $10.5 billion. I mean, clearly that's a nice return on that investment in a very short period of time. And I think you attribute that partly, at least, just to their expertise in this space. So, kind of the nature of their business model, right? You find attractive assets at attractive prices. You have a strategy in place. You buy them. At some point, they want to realize that investment, right? Realize the gain on that investment one way or the other. And so selling these for more than they bought them is kind of a nice value proposition for Bravo as well. So you just rinse and repeat, right?

Right. Yeah. Who doesn't love doing things like that? So do you think that there's more software acquisitions in their future. It seems like it's still a good time to be buying. A lot of companies, they can't get a lot of venture capital. They can't really go to the IPO market right now. We're still in that weird space. So is this still an active, fertile place for them to be hunting? I would imagine it is. I mean, I would imagine with the way, I mean, obviously, I guess technically we've entered a new bull market. It doesn't really feel that way, though, doesn't it? I mean, it's kind of maybe we can wait and see if this really lasts. But, I mean, I think that there are still plenty of valuations out there that certainly look a lot

more attracted than they did just a few years ago. In that regard, I would imagine they are absolutely taking a very close look at a number of businesses. It seems like they're going to have a nice little cash infusion here very soon where they'll be looking to put some more of that money to work. I would not be surprised to see them making an announcement of an acquisition or two here before the year's end. Makes sense. Thanks for your time today, Jason. Thank you. Even if you don't trade options, stock investors still feel their waves. On Jain Nagpal is the host of the podcast Brokers, Bagman, and Moles about the birth of financial futures and a little-known FBI investigation of the Chicago Mercantile Exchange. Can you set up the era of the Merck before financial

futures were even trading there? The Chicago Mercantile Exchange and the Board of Trade, they started out as agricultural exchanges. And I mean, literally where farmers in 1800s would go to exchange crops, you know, to buy and sell crops. and livestock and things like that. And then over time, instead of actually trading the animals and the crops, they started trading futures on those things. And that was the very short version of how these exchanges came to grow into the behemoths that they were.

But there's a key figure that you cover in your show, Leo Malamad, who has this idea to move the center of finance out of New York City. Something that was surprising to me was that on Wall Street, they didn't want to be. They didn't want to do the options for financial instruments, like stocks and mutual funds, where you could bet on the future price of a security. Yeah. You know, Leo Malamud is really the kind of single person. He's known as the godfather of futures.

You know, we tell a great story in one of our episodes about him where, you know, he had this idea to create futures, not just on agricultural products, but on financial ones. And that really, you know, spurred the massive growth of the exchange. in the 80s, and it was a study that he commissioned by Milton Friedman that actually convinced his fellow exchange executives and other people to allow him to do that. So it's a really, really fascinating story. Yeah, one part of that story that I found interesting is that he faced a lot of pushback in bringing these financial instruments to exchanges, which would be, for me, at least unexpected

for Wall Street or Chicago. Yeah. You know what, look, I think no matter what industry you're in, you're in, there's people that are a little bit afraid of innovation, right, and are a little bit afraid of evolution, but Leo is definitely a forward thinker. But he got his point across. So let's, I want to get into some of the trading itself, because you talked to some people who knew Leo, and you would think a guy like this would be an excellent trader, because

he set up the game. And while you met many traders who might have had an edge, you know. in somewhat savoury and unsavory ways, Leo didn't necessarily have an edge trading securities on the game that he created. Yeah. Yeah, well, first and foremost, we haven't obtained, you know, all the information about trading is anecdotal. We haven't obtained any trading records for him, but it's anecdotal from a lot of people.

And so we can refer that was the case that he didn't make a lot of money trading at all. In fact, quite the opposite of what we heard many times. But the other thing that says about him is that he wasn't taking advantage of his position. He wasn't getting inside information from D.C. as was accused or rumored to be accused around this time. He was a gambler, was a trader, traded a lot, apparently. And like you said, creating the products didn't help him. I mean, the market is, you know, as you know, as your listeners know, the market is hard and it doesn't favor anyone. But the thing that really seemed to work to his disadvantage was that he was very emotional about his trades.

Yeah, that's the story we heard from several of his former employees. And I think Warren Buffett definitely is the kind of embodiment of the opposite side of that coin. Who will tell you not to get emotional? So if you're a trader or an investor, I think one thing you really have to think about is your edge. One trader you spoke with was Louis Bolsellino. And he said that his edge was temperament, the ability. to stay calm when others were panicking. Do you think that was the most important edge for a lot of these traders? What were the edges that you encountered in reporting your show?

Certainly, staying calm while others are panicking is very important. And I've experienced that myself, and many great traders will tell you that. There are certain other aspects, certain other characteristics that make somewhat a great trader. Especially on those exchanges, though, it was really the set of skills that you needed to be a good trader on the floor of the exchanges is very different than the set of skills need now, and we could talk about that in a second. But at the time, it was really kind of like, you know,

almost like being a good poker player. You had to know how to read the room, right? So you can kind of see, so for example, if you're standing next to a big broker and he gets some like really big order, or his eyes might go wide, or he might get a little nervous, or he might start kind of looking at his biggest local traders that he's going to trade with. And so you can kind of pick up on, oh, this guy's got something.

Like, there's an order coming into the pit, and it looks like it's going to be a big one. And you also can keep track of things. So if there was a, you know, let's say Goldman Sachs came in and bought a bunch of futures in the S&Ps, well, you know now that they're long and at some point they're going to probably unload those. So kind of keeping in mind, you know, which

customers have what positions is also another one. But just really thinking fast, reacting fast, reading a room, and being incredibly aware of your surroundings is what made Lewis a great trader and what makes a lot of people, what made a lot of great traders on the floor of the exchange. It seems to be that ability to process a lot of information at the same time. And that would be information that someone who's outside of the trading floor wouldn't necessarily have, and you can see how the game changes a little bit. You were a trader at the Merck from 2000 to 2005. How did you see that sort of trading change throughout your career? And then we can get to how it continues to change today.

Yeah, I mean, I was there during a time of great transition. I traded options rather than futures, and, you know, options are really complex. The pricing of options is an art and a science that involves understanding calculus and kind of multivariable calculus at that. So trading evolved a lot during those years because, first of all, they were starting to go electronic, right? So at least trades were being entered as opposed to being written by hand on a card. They were now being entered into little computers and kind of memorialized instantly. And that's a big part of what was wrong at the Merck and the Board of Trade, so long, it was like, it was hard to create an audit trail for a trade because you just,

the rules said that you had to hand in these, like, trading cards of what you did every, like at the end of the day or, you know, and that time period kept getting shorter. So then it was 15 minutes and then it was, you know, a few minutes and then it was, you know, pretty instantaneously, you know, which makes sense. Like you want to get those, if you're going to be able to regulate a trading floor like that and open outcry trading, you got to have an audit trail. You can't just hand in a bunch of cards at the end of the day and expect nobody to take advantage. So what exactly was the FBI looking for on the floor of the Chicago Mercantile Exchange?

So what they claimed was that they were trying to catch brokers stealing from their customers. That was the claim. But what we reveal in our show, if you get to the last few episodes, is that they were actually there for more than that. when it comes to brokers stealing from their customers, you know, it's a really hard thing to prove because there's so much happening at once on the trading floor. So trying to trace trades by sitting next to someone and having a tape recorder in your pocket is really hard and it was hard to prove in court. So there's a lot of dynamics that made it just such a fascinating investigation. But the gist of it is, hey, these guys are.

taking orders and they're in a variety of ways, ripping off their customers and giving some profits to people around the pit, and then splitting the difference with them and pocketing money that is being stolen from customers. So take us to the floor. What's it look like to go undercover as an FBI agent trying to look for these bad actors fixing trades? It wasn't until I actually sat down and talked to the FBI that... I really developed a lot of admiration for how hard their job was.

They didn't always design the investigation. They didn't prosecute it. Their job was just to go down there and fit in. And that was probably the hardest part of their job is to fit in because, you know, Chicago's episode number one of our show is called the biggest small town in the world. And so a lot of the people that were at the Board of Trade and the Mercantile Exchange, they kind of knew each other or they knew of, you know, they had some relative to comment or, you know, they had some commonality.

So these four FBI agents had to go undercover and kind of pretend like they were, you know, like they belonged. And that in and of itself was hard. Then they had to learn futures trading. That's hard. You know, and then they had to gain the trust of a brook, of a crooked broker who wanted to use them as a bag man to park money that they would later, you know, that they were rip off from the customer and later on split.

As always, people on the program may have interest in the stocks they talk about. and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Deidra Woolard. Thanks for listening. We'll see you tomorrow.