Understanding Carl Icahn's Oshkosh Strategy

| About: Oshkosh Corporation (OSK)
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"A lot of people die fighting tyranny. The least I can do is vote against it."

- Carl Icahn at Texaco annual meeting. Jan. 20, 1988

Right on top of the Icahn report, you will see this little notice which sums up Carl Icahn's takeover philosophy. Icahn, the USD 14 billion dollar American business magnate, identifies a company that he thinks is, a) undervalued, or b) undermanaged, builds up a stake in the company, and then either tries to influence management by getting his nominees elected in the Directors' Board, or comes out with a proxy war to take over the company and give it a new direction. In the process, usually, company shareholders make money at least in the short term because the price of the stock goes up; Icahn definitely makes money. Here's a chart of his major takeover bids; I readily acknowledge that this cursory view does not do justice to individual takeover tales. My goal is only to give a broad view and comment on general strategies.

Key Takeover Bids By Carl Icahn

Mylan Laboratories (NASDAQ:MYL) - In 2004, Mylan announced a deal to acquire King Pharmaceuticals. Icahn thought that Mylan was paying too much for King Pharma. So he purchased a lot of Mylan shares and threatened a proxy war. Early in 2005, Mylan gave up on its goal of buying King Pharma. Its management claimed that had nothing to do with Icahn's threat.

Time Warner (NYSE:TWX) - In February 2006, Carl Icahn and Bruce Wasserstein (CEO of Lazard Frères ) led a group of shareholders who proposed breaking up TWX into four companies with a $20 billion stock buyback program. TWX management agreed to the buyback call, as well as to cut back $1 billion costs, in exchange for Icahn not contesting TWX board's re-election next year.

Yahoo! (YHOO) - In 2008, Icahn entered into a long battle against Yahoo! and its then CEO Jerry Yang. He purchased 50 million Yahoo shares in May, and said that he would begin a proxy fight because of Yahoo's irrational rejection of Microsoft's (NASDAQ:MSFT) takeover bid. This bid was rejected by Yang, who said that MSFT must raise the bid from $33 to $37 a share. Yahoo had a poison pill plan in place; MSFT backed off, but YHOO shares plunged and Jerry Yang was forced to resign.

Marvel Comics - Marvel Comics' acquisition by The Walt Disney Company (NYSE:DIS) in 2009 might have something to do with Icahn's trying to take over the company, which brought him into conflict with Avi Arad, Ron Perelman, and Ike Perlmutter.

Biogen Idec (NASDAQ:BIIB) - Icahn led a long standing feud against Biogen beginning 2007. He held a 5.6% stake in BIIB stock, and used this as leverage seeking to acquire, break up or sell off the company into various parts. He ended up getting two nominees on the board, with the explicit goal of replacing then CEO James Mullen and breaking up BIIB into two different companies.

Mentor Graphics (NASDAQ:MENT) - MENT signed a "poison pill" provision with its shareholders in July 2010 after Icahn acquired a 14 percent stake in Mentor Graphics. This is a shareholders right provision where hostile bidders do not negotiate directly with shareholders, but with the whole board. This device became popular in the 1980s to prevent corporate raiders from taking over a company (and replacing its management) at vastly undervalued offers. Icahn offered to buy MENT for $1.86 billion in cash in early 2011. However, MENT board successfully prevented a takeover.

Lear Corporation (NYSE:LEA) - On February 9, 2007, Icahn offered to takeover Lear Corporation for $2.3 billion. It was rejected by shareholders.

Motorola (NYSE:MSI) - In January 2007, Icahn lobbied for a seat on Motorola's board by leveraging his 1.39% interest in the company. He was turned down at the next shareholders meeting in May.

Carl Icahn did not give up his pursuit of Motorola. He sued Motorola in March 2008 in order to gain 4 seats on its board and force it to sell off its mobile business.

BEA Systems - In September 2007, BEA Systems stock soared 4% after Icahn disclosed in an SEC filing that he owns a 8.5% stake in the company. He also suggested that BEA should plan to sell itself off. By October, Icahn had a 13.22% stake in the company. In January of next year, BEA was sold off to Oracle (NYSE:ORCL).

Imclone - In 2008, Bristol Myers Squibb (NYSE:BMY) offered to purchase Imclone at $62 a share, an upwardly revised offer that Icahn described as absurd. He launched his own proxy war against Imclone, trying to sell it off to Eli Lilly (NYSE:LLY) for $6.5 billion.

XO Holdings (OTC:XOHO) - In 2009, Icahn tried to purchase XO at 55 cents a share, which the company rejected as undervalued. Icahn's previous attempts to buy out the telecom assets of XOHO was opposed by the shareholders, who filed a lawsuit alleging that Icahn as a director at XO had hurt shareholders willfully by refusing to refinance debts when capital was offered, and preventing other buyoff offers that were higher than his own. 5 other class action lawsuits were filed alleging Icahn's self-dealing, inadequacy of his offer, and depressing the stock price illegally, as also using $3.5 billion NOLs by himself. In response, Icahn raised his stake to 80 cents a share. That was also rejected.

2 years later, he was back again with an offer of 70 cents a share. In July 2011, he raised the price to $1.40 after XO hired JP Morgan (NYSE:JPM) as valuators.

Lions Gate Films (LGF) - From March 2010, Icahn tried to buy LGF off after his proposal to own a 30% stake in the company was rejected. He tried, and failed to put his nominees on the board. He also lost a court battle against Mark Rachesky, an LGF director, from exchanging debt for equity that would have resulted in Icahn's stake in the company lowered to 33% from 38%.

Clorox (NYSE:CLX) - Carl Icahn has for a long time suggested that CLX sell itself off. When that suggestion went unheeded, he tried to get 11 director nominees on board, including son Brett, Vincent Intrieri, a trusted lieutenant, and himself. He did not win enough support from the existing board, however, and withdrew from the proxy fight in September 2011.

Commercial Metals Co. (NYSE:CMC) - In January this year, Carl Icahn was forced to quit his hostile takeover attempt of CMC after shareholders failed to support him. Icahn had long lobbied against CMC management, wanting CMC to sell, and even offered to buy it at $1.73 billion.

As a result, CMC shares fell to $14.05 in January 2012, even less than Icahn's $15 offer, after it had rallied to over 39% since acquisition talks began in October. However, the $15 falls far short of the $39.80 price that the stock had reached in June 2008 at its then all time high.

Strategy and Outcome

As we can see from the above data, Carl Icahn has a long history of attempts to control a company in order to sell it off to make a profit. In order to do this, he generally starts off by increasing his stake in a company he considers a target. He then begins a lobby to replace the company's management with his nominees. It has also been alleged - as in the case of XOHO - that Icahn resorts to some overly controlling measures in order to lower the price of a company on which he holds director positions, and which he intends to takeover. This, in a nutshell, is his strategy.

Now, for shareholders and investors alike, as well as for the company itself, Icahn's war is sometimes good, sometimes bad. A management that is encrusted into the company's underbelly despite performing poorly needs to be replaced. A company that is being forced by its management to venture into unprofitable acquisitions or sell-offs needs to be controlled in the interest of the shareholders. For example, in the above cases, I notice that Yahoo did actually profit from the ouster of Jerry Yang, and CMC shareholders did see a considerable gain in the 3 months that takeover talks were underway. Although it will take more analysis than I can afford to do here, it seems to me apparent that many proxy wars waged by Icahn has been won by shareholders, one way or the other. So, any discussion of outcomes of these wars has to be instance-specific.

Let's see how his current war against Oshkosh (NYSE:OSK) might affect shareholder interest. Icahn holds nearly 10% of the company's stock. This month, he said he intends to offer $32.50 a share for Oshkosh. OSK, which was trading at around $27, shot up to above $31 after the offer, and has stabilized at around $30 now. Therefore, Icahn's offer represents roughly 21% premium over OSK's current price. However, Oshkosh saw prices of $65 in July 2007; so Icahn's offer is exactly half Oshkosh's all time high price.

Oshkosh, the Basics

Founded in 1917, Oshkosh Corporation has operations in 8 U.S. states and in Australia, Belgium, Canada, China, France, The Netherlands and Romania, according to its website. OSK currently employs approximately 13,100 people worldwide and its CEO is Charles L. Szews.

Oshkosh operates in 4 segments, Access Equipment, Fire & Emergency, Defense and Commercial. A quick table with its major units is given below.

(Click to enlarge)

The company's brands include Oshkosh, JLG, Pierce, McNeilus, IMT, Frontline, Jerr-Dan, CON-E-CO and London. JLG, acquired in 2006, leads the pack with a diverse product portfolio, including leading brands such as JLG aerial work platforms; JLG, SkyTrak and Lull and telehandlers.

OSK's Pierce brand is North America's top fire truck manufacturer. Oshkosh is among the world's principal defense vehicle manufacturers. McNeilus brand concrete mixers are used by more concrete producers than any other. McNeilus is also North America's leader in refuse collection bodies. Jerr-Dan is a top name in towing and recovery equipment. CON-E-CO is a chief U.S. concrete batch plant manufacturer, and London is the leading Canadian concrete mixer manufacturer. (Source: OSK website)

Acquisition History

1996 - Pierce Manufacturing Inc.

1997 - Nova Quintech

1998 - McNeilus Companies Inc.

1999 - Kewaunee Fabrications LLC

1999 - Viking Truck & Equipment

2001 - TEMCO

2004 - Jerr-Dan Corporation

2005 - CON-E-CO

2005 - London Machinery Inc.

2006 - AK Specialty Vehicles

2006 - IMT

2006 - JLG Industries

Key Problems in Oshkosh:

Oshkosh has so far failed to cope with the economic regression that began in 2008.

  • After the collapse of the U.S. construction sector following 2008, demand for JLG's products and OSK's construction products saw a steep plunge; OSK posted a 66% drop in net income last year.
  • The company didn't recuperate enough with better sales even after the recession ended.
  • With the U.S. government scaling back on defense expenditure under the Obama administration, Oshkosh saw a decline in its defense business.
  • The valuation of the company is tied in with its top brand, JLG, which is dependent on the underperforming construction sector.
  • OSK's fire and rescue unit saw declining sales after state and local governments shrunk public safety budgets recently.
  • According to a recent Piper Jaffray analysis, company-wide sales will contract by 4% in 2013 and 13% in 2014 as a result of government budget cuts.

The company claims that demand for JLG equipment has been improving lately. In the same Piper Jaffray research, analysts say that Oshkosh has stepped up efforts to raise margins by lowering costs, opening up global markets and making operations efficient. Earlier this year, it outlined a plan to double earnings per share by 2015 even if revenues were lowered.

However, Icahn is not satisfied by these measures. He has repeatedly asked OSK management to make bolder decisions, including selling its JLG unit and spinning off its military production arm.

"It is clear to me that management has taken a passive attitude to the future of this company," Icahn said. "They have suggested that shareholders should be willing to tie a defense contractor and a construction-equipment company together, and wait another four years to see if the defense business will be viable on its own, or if it will become an anchor and drag down the entire company. Oshkosh needs a proactive management team."

Can Icahn Help Oshkosh

Analysts and market watchers never doubt that Icahn's wars are less philanthropic and more to do with making money for Carl Icahn. However, sometimes, Icahn's gains can translate into shareholder gains. Almost universally, when Icahn declares war on a company, that is true in the short term. However, in this case, is it also true in the long run?

I think not; the U.S. defense cut in the current administration is a temporary measure. The defense budget is going to at least stabilize even if the current government continues next year. If it doesn't, a Republican government will surely see a higher defense budget, given the tensions still existing in the Middle East and North Africa, to say nothing of the perennial cold war in the Pacific with China.

The construction sector is also improving slowly; that alone is a tremendous potential for OSK's construction units. Also, it seems to me that Icahn has a special eye for JLG, which is the most revenue-generating unit OSK has. That gives me reason to understand that Icahn actually thinks that JLG will do well in the near future. So, while Icahn's offer will surely benefit daytraders and other short-term investors, shareholders might want to give this offer a long, long thought.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.