By Pete Gallo
If they ever form a club for contrarian hedge fund managers, it's likely Carl Icahn would refuse to join, just to show he was the most contrarian investor of all.
That's too bad because other contrarians would probably want to ask him about one of his more unusual bets—especially his big investment in video-game maker Take-Two Interactive Software, which has recently rebounded. (The stock on March 10 set a recent high of $10.50 per share, up from an abysmal low of $7 set in early December.)
Icahn Partners has been a major shareholder in the company since 2007. But in the final days of 2009, the hedge fund upped its stake in the company from a speculative two million shares to an eye-popping 6.7 million shares, representing an 11% stake in the company.
So what was he thinking? Certainly Icahn couldn't allow himself to miss out on a buying opportunity. As the stock slipped by more than $3 per share between November and December, filings with the SEC show Icahn Partners went on a shopping spree. In doing so, the hedge fund widened its lead as the game maker's largest shareholder. (Harbinger Capital Management is the company's second-largest stakeholder with 5.8 million shares, according to regulatory filings.)
The bet proved a winner for Icahn. As the stock rose to $10.50 (on March 10), the hedge fund's position stood to jump to roughly $70.4 million, as shares climbed roughly 50% over December lows.
But all of this was less than obvious. Projections for the video gaming sector's revenues after a huge growth spurt were on a trajectory to slump when Icahn upped his fund's stake.
Analysts predicted the gaming sector was too crowded and that effects of the recession would squeeze sales. Even Icahn's market fans cringed at his big bet.
It turns out that the naysayers were right—at least in part. The sector's sales came in worse than anticipated at $624 million in February, a 15% drop over the same period 12 months earlier.
The only thing they missed in their thesis—which Icahn got right—was that the top video game titles with the highest sales for the sector came from Take-Two's lineup.
In other words, Wall Street analysts saw the sector as an overgrown forest, but only Icahn's contrarian eye managed to paint a bull's-eye on the right tree.
And he deserves kudos for throwing cash at a company many had considered a has-been at exactly the time the stock slumped on wider fears of an industry-wide contraction.
Still, the critics may eventually be right. Rival game maker Electronic Arts two years ago wanted to buy out the company for $2 billion, and it seems unlikely that Take-Two will see another $26 per share bid anytime soon.
Icahn surely can see that if consolidation is inevitable for the industry, players like Activision Blizzard or others might come to the table at some point down the road.
As the largest shareholder in Take-Two, he must also be aware that the company has inked a deal with OnLive, a platform that starting in June will allow gamers to stream Take-Two console titles over the Internet, which should boost sales and perhaps provide recurring revenues, considered the Holy Grail of the gaming industry. Until now this has been a PC phenomenon, dominated by Activision Blizzard's World of Warcraft franchise.
Somehow I don't see Icahn leaving board meetings early to secretly play World of Warcraft.
But he is certainly a crafty enough investor to see that recurring revenue models and licensing opportunities are just in their infancy for the video game industry.
And any involvement by Take-Two will not only help his bottom line on a quarterly basis, it will also make the company a more attractive takeover target down the line, if he is thinking about an exit strategy.
If anything, Icahn may be secretly hoping that Wall Street analysts continue to overgeneralize about the sector's short-term prospects so that Take-Two shares occasionally dip low enough to make adding to his stake less expensive.
Other large positions in the Icahn Partners' portfolio are Genzyme, Wendy's, Biogen Idec and Lions Gate Entertainment, for which Icahn launched a hostile takeover bid on March 19.
The hedge fund is also a large investor in Yahoo, though that position was trimmed in the last quarter of 2009, according to SEC filings.