Shareholder activist Carl Icahn serves both as chairman and majority shareholder of XO Communications and his methods are under fire, questioning whether he truly practices what he preaches, according to The New York Times.
XO Communications peaked during the telecom bubble, originally named NextLink. It was founded by Craig McCaw, a wireless pioneer. Forstmann Little & Company, a private equity firm, invested $1.5 billion in the company but later realized they had made a poor investment when XO was in bankruptcy. It was delisted from the stock exchange and its shareholders completely wiped out, according to the NYTimes.
The company negotiates with the investors and can often lead to the bond holders controlling the company. The scenario is ideal for vulture investors. Icahn was able to take it over both as its majority owner and the holder of 90 percent of its newly issued debt.
Some businesses’ sole purpose is to take on debt-laden companies. R2 Investments, a 14-year-old hedge fund, run by Geoffrey Raynor, deals almost exclusively with “distressed” debt and bankrupt companies.
Icahn claims that since no one is willing to step up and refinance the debt owed by the failing company, he has stepped in. Critics say he purposely refused to refinance because the weaker the company got, the better chance he had of gaining 80 percent, thus receiving operating losses.
In the case of R2 Investments, whose stake is now two or three percent, the firm has gone back to court, asking for the right to look at XO documents to see whether Icahn played fair with shareholders, according to NYTimes. While R2 could bring the matter to court, the chances of winning a lawsuit remain low. Since the transaction has already been completed, R2 would have to come up with comparable evidence and the courts will most likely be unwilling to unwind it.