Thursday, December 26, 2013

Making Money Doesn’t Mean One Added Value

Making Money Doesn’t Mean One Added Value

Carl Icahn made over a billion dollars by restructuring part of CVR Energy (NYSE: CVI) into a Master Limited Partnership (MLP).  As a regular corporation CVR had to pay corporate taxes, and investors had to pay taxes on any dividends.  As an MLP all the tax liabilities are passed through to investors, and double taxation is eliminated.  As David Gelles points out in The New York Times,[1] there’s been a steady stream of MLP deals since 2007.  Investors are eager for the yield produced by these sorts of investments. 

The details of Mr. Icahn’s exploits are ably laid out in Mr. Gelles’ story, so I won’t repeat them. Mr. Icahn’s use of the term “value” caught my attention.  He said, “We saw the added value of creating a M.L.P.”  As far as I can tell Mr. Icahn followed a well-established tax strategy, rather than creating any particular value.  Investment bankers and investment managers tend to prefer talking about value creation rather than making money.  Describing an investment as having “added value” tends to confer a touch of economic validity to a moneymaking trade.

There's little doubt that Mr. Icahn made a lot of money adopting the new legal structure. CVR Energy is still in the refining business, and day-to-day operations weren’t improved in any way. Mr. Icahn merely took advantage of the tax code.  The initial public offering of the MLP allowed the company to pay Mr. Icahn a hefty dividend with the proceeds.  Moreover, as investors chased after yield, the MLP’s value escalated.   Mr. Icahn deserves credit for making a shrewd investment.  However, he didn’t create any real value.


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