“THE CARL EFFECT” RECENT PROXY WARS AND SHAREHOLDER WEALTH
Sometimes, there is method in madness. Sometimes, madness is the only plausible method. At times, however, it is just sheer madness!! Carl Icahn, has been a big gun in the corporate proxy war game for decades. One can also call him a corporate raider or a trader, who trades outside the stock market because his bets are too big for the ticker to tackle. Carl has a pattern-like method of identifying supposedly “undervalued” or “poorly managed” companies and trying to influence their future through boardroom coercion.
First, he creeps into becoming a substantial shareholder and then tries to get bigger by asking existing shareholders to sell his stocks to him. He also tries to force the board to accept his nominations for Directors. His contention is that the existing Directors or Managers are unable to do justice to the potential of the organization and, therefore, a change of some kind is required. The change is usually a risky strategic move which only a new board, with his own members, can implement. At the end, usually, he gets out of these organizations at a profit by selling his stake. However, not all his attempts at takeover are successful. Some fail as the existing shareholders do not buy his story of the need for a dramatic change to alter the fortunes of the company (Oshkosh). Some may have failed for valuations. Even poison pills have worked against Carl’s endeavors (Navistar). Those that succeed, though, are multi-million dollar winners for the activist, investor cum business magnate.
Obviously, such humungous acquisitions are not magnanimous or philanthropic. Ultimately, it is about investing in the potential of a company, with the stock becoming a derivative of the future performance. Mind you, Carl takes substantial risk in investing in these companies, at times when they are in the red or doing even worse (Dynergy).
Coming to specifics of the recent bids by Carl, a notable kill in the game is Navistar International Corp (NYSE:NAV). Financial performance of this U$13.9 billion truck maker has weakened dramatically after its recent failed strategic move to build a new diesel engine technology. The cost of this failed technology has been pegged at US $ 700 million or thereabouts and this has been back-breaking for a wonderful growth story. The company is expected to post a net loss in 2012 with sales remaining mostly flat. Carl has come down heavily on the management for this failure and, with his 14.95% stake, succeeded in getting nominations on the board with the latest being Samuel J. Merksamer, his protégé and Managing Director of Icahn Capital LP. Regarding the share performance of Navistar International Corp (NYSE:NAV), since October 2011 when Carl publically declared a substantial holding in Navistar, the share price has been on a roller coaster ride with a definite declining trend. This is because, while the Carl influence pushed the price upwards in the short term, in the medium term, the cost of failed new engine technology killed the stock. Even after Carl increased his stake from 9.9% to 11.87% in June 2012, the share prices went up only temporarily. The stock is presently less than half its peak 52 week value of around US $ 48. The P/E is more than 110 compared with the industry average of around 13.43.
Another big takeover attempt by Carl in the recent years has been the Oshkosh Corporation (NYSE:OSK). Oshkosh Corporation (NYSE:OSK) is another truck manufacturer with around US $ 8.18 billion in sales in 2012. Net income of this company has been negligible with the company tottering towards the red. Carl publically declared his 9.5% holding in the company in June 2011. His subsequent open offers to shareholders have failed twice in the recent past with the latest offer for acquiring “any or all” shares of the company at $ 32.50 falling a few percentage points below the required 25% tendering. The stock price of Oshkosh has been on an uptrend since the past year and is trading near its 52 week high thanks mainly to the open offer price, which was substantially higher than the market price in October 2012. The recent failure of the offer is, however, likely to keep the prices in check. The P/E is 11.30 compared with the industry average of 13.43. Though, the financial performance of the company is not much to write home about, there are signs of moderate recovery as the US economy struggles to find feet in the blue.
In case of Dynegy Inc. (PINK:DYNIQ), Carl’s attempts to thwart The Blackstone Group L.P. (NYSE:BX)’s takeover bid in 2010 worked for the shareholders to a certain extent. The initial offer of The Blackstone Group L.P. (NYSE:BX) at US $ 4.5 per share was ultimately raised to US $ 5. Then Carl himself tried winning over the shareholders with a US $ 5.50 bid which ultimately fell due to lack of support from the shareholders.
The latest takeover target of Carl is Netflix, Inc. (NASDAQ:NFLX) the online DVD rental and internet streaming media company. In October 2012, Carl announced that he held around 9.98% holding in the company. He declared that the company is substantially undervalued and needs management changes. The stock has gained tremendously after October 2012 with price rising from around US $ 55 to more than US $ 90. The 52 week high for the stock is around US $ 133.
The question is, what has all this aggression done to shareholder’s wealth? In recent times, the “Carl effect”, has been mostly positive on the stock prices in the short term with stocks sometimes hitting the circuit on the news of his interest. In the medium to long-term obviously, the performance fundamentals matter. However, if anything, a Carl attempt shakes the management and the board to becoming more alert and agile. It forces them to some introspection. A Carl interest in the company is an alarm that something is not right in the way things are going. It also alludes that there are some insiders who are not totally satisfied with the present strategies. On the other hand, however, these hostile takeover bids distract the organization and make it a little extra circumspect about itself. The morale of the employees is adversely affected which again hurts performance of the organization.
To summarize, Carl’s takeover bids are genuinely commercial attempts to en-cash the growth potential of the company or at least its share price. His take is that the fundamentals of the company are not optimal and there is a lot of scope in improving the efficiency of strategic management of the organization. Here Carl, like any other investor, can be wrong or right about it. Likewise, the takeover bid may be based on an erroneous judgment about what is right for the organization. One has to keep in mind that Carl is not on the board while creeping up his stake and thus, does not have perfect insider information about the way the company is being managed.
Thus, while his past notoriety and sheer financial muscle power may take the stock prices higher in the near term, the long term story of the share can only be determined by the fundamentals. It is for this reason that the Carl effect is not standardized and he has created as well as destroyed shareholder wealth over the past few decades. He is, however, not doing too bad with his own net worth valued at around US $14.8 billion!!