Icahn's Takeover Attempt and Poison Pill Indicate Buying Opportunity

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Activist investors “actively” seek investment profits by investing significantly in a company, taking over a board of directors, making changes at a top management level and implementing different corporate governances and/or different business strategies. Most of the time, active investors could drive the top line and bottom line of a company, which drives up its share price over time. It could be considered a good sign when a successful activist investor invests in certain companies. However, not all investments have turned out to be successful for them. That was a recent case of Carl Icahn, the billionaire founder and chairman of Icahn Enterprises (NASDAQ: IEP), when he tried to acquire Oshkosh Corporation (NYSE: OSK) for $32.50 per share, for a total $3 billion.

To begin his acquisition thesis, he mentioned in his letter to Oshkosh shareholders that as a long time shareholder, he lost confidence in the management team, as they couldn’t deliver what they have promised. He has watched Oshkosh share price begin to drop from the $62 level since 2008 and blamed that on the current CEO, Charlie Szews. According to him, shareholders can either tender their shares at $32.50 or vote for his slate of directors to replace the current board of directors and execute successfully a spinoff of JLG, a leading lift equipment manufacturer. He said: "It is clear to me that management has taken a passive attitude to the future of this company, willing to sit back and watch what happens to the defense, housing and construction industries, hoping for a positive outcome and reduced competition. 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. I strongly believe that Oshkosh needs proactive shareholders to bring a proactive management team together to weather a volatile economy, a shrinking defense industry and a budget constrained municipal environment." After the announcement of the tender offer, Oshkosh share rose from $26.85 to $29.90. A $32.50 tender offer price represented a 21.5% premium in the previous trading day price of $26.85.

Indeed, in the past 10 years, Oshkosh shareholders have experienced a wild swing in the range of $5-$65. Currently it is trading at $29.47 per share, with total market capitalization of $2.7 billion. 

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Oshkosh board did not agree with the tender offer, it unanimously rejected Icahn’s offer and considers it as “unsolicited, inadequate, highly conditional, and opportunistic, significantly undervalues Oshkosh”. It did not seem to be enough. Recently, Oshkosh board has adopted a poison pill to prevent Icahn’s takeover. A poison pill is a shareholder rights plan, which allows current shareholders to buy newly issued shares of a company at a discount. This plan focuses on dilution and increases the acquisition cost of the current takeover buyers. In Oshkosh’s case, if any shareholder acquires more than a 10% stake, they would all be allowed to buy more shares.

For mergers & acquisitions, the common ratio that is often used, is EV/EBITDA. At the current price, its EV/EBITDA is 6.16x. Icahn is ready to pay $32.50 per share, so Icahn values Oshkosh at 6.79x EV/EBITDA. Compared to its competitors including Terex (NYSE: TEX) and Federal Signal Corporation (NYSE: FSS), the price of Icahn’s tender offer is still cheaper. Currently, Terex is trading at $23.26 per share, with the market capitalization of $2.57 billion and it is valued at 7.11x EV/EBITDA. Federal Signal is trading at $5.73 per share, with the market capitalization of nearly $357.3 million and it is valued at 9.68x EV/EBITDA.

My Foolish Take

Icahn’s move to acquire the company at $32.50 means that Oshkosh is worth much more than that. In addition, the company was valued the cheapest compared to its competitors. Personally, I think Oshkosh could be a decent investment opportunity for long-term, patient investor at the current price.

hoangquocanh has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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