Carl Icahn is Betting Billions on AIG Stock; Here’s Why

AIG StockIs AIG a $100 Stock in Disguise?

There are few companies as hated as American International Group, Inc. (NYSE:AIG), yet AIG stock has performed surprisingly well in recent years. Now, Carl Icahn thinks the company should spinoff some of its businesses to take the company’s stock even higher.

In case you’ve never heard of him, Carl Icahn isn’t just your run-of-the-mill hedge fund manager. His legendary investor activism (or corporate raiding, depending on who you ask) has earned him a fortune that stretches into the billions.

Icahn is usually drawn to stocks that need a little nudge to realize their full potential. For instance, he’s taken a big stake in Apple Inc. and is pushing the company to use some of its $205-billion cash reserves on dividends and stock buybacks.

To put it mildly, Icahn isn’t shy about voicing his opinions to management, something that AIG’s CEO, Peter Hancock, learned in recent weeks. In an open letter published on October 28, Icahn demanded that AIG split itself into three separate companies. (Source: “Carl Icahn Issues Open Letter to Peter Hancock,” CarlIcahn.com, October 28, 2015.)

Apparently, the direct conversations between Icahn and Hancock that followed didn’t go well. Another open letter published on November 23 suggested the negotiations came to an impasse. Icahn even hinted that he wants to replace Hancock with a friendlier CEO.

Icahn Wants a Management Shuffle at AIG

So, what is it that Icahn wants? To put it simply, he wants AIG to divide its mortgage, life, and property and casualty insurance divisions into three separate, public companies. The split would help drive a much higher AIG stock price.

There will be two significant turns for AIG if Icahn gets his way. First off, financial regulators currently classify AIG as a systemically important financial institution, or a “SIFI.” That ranking comes with a lot of burdensome regulation. Freeing AIG stock from the weight of unwanted regulation would help make the company more nimble.

Additionally, in his first open letter to AIG, Icahn argues, “Separate monoline companies will be more focused, more efficient, generate better returns and, as a result, command significantly higher market valuations.” (Source: Ibid.)

But Hancock and his team at AIG aren’t buying what Icahn is selling. Normally, that would be the end of it. A large investor applies some pressure, but management doesn’t yield, forcing the investor to try another strategy. That’s not the scenario with Carl Icahn.

“We have also met and had a number of conversations with AIG CEO Peter Hancock, and he has invited us to continue having conversations,” wrote Icahn in his second open letter regarding AIG. “However, despite that invitation, in all of our discussions with Mr. Hancock it was abundantly clear to us that he is not willing to take the bold steps that we, and so many other shareholders, believe are long overdue.” (Source: “Carl Icahn Releases Statement on AIG,” CarlIcahn.com, November 23, 2015)

In case you missed that, Icahn took Peter Hancock’s refusal as a sign of all-out war. Icahn is not the kind of person you want to cross.

The Huge Upside for AIG Stock

There’s probably an incessant stream of phone calls being made on the top floor of AIG headquarters. No one can mistake what Icahn meant in his latest statement. It was deliberately transparent.

“[Hancock] failed to lay out any alternative strategic plan with the potential to unlock value for shareholders or to provide compelling reasons as to why these businesses belong together,” wrote Icahn. “We do not believe that he will ever sincerely consider what we, and so many others, have proposed.” (Source: Ibid.)

It’s unusual for a major investor to publicly discredit a CEO like this. But Icahn doesn’t play nice when someone is standing in the way of what he believes is best for the company. That’s why he’s been so successful for so long.

The end of the letter was probably the most telling part. Icahn said his team will be building a coalition to dialogue with the AIG board of directors, “which may include a proposal to add a new director who would agree in advance to succeed Mr. Hancock as CEO if asked by the board to do so.” (Source: Ibid.)

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