If you open the widely-read Value Line Investment Survey to pages 170-171, you will find corporate profiles of Navistar International and Oshkosh Corporation facing each other. This apparently has given billionaire investor Carl Icahn an idea: merge the two companies into a $20 billion behemoth that can dominate the domestic truck-building industry. Having acquired ten-percent stakes in both companies, Icahn floated the idea of combining them on CNBC last month. Tony Bertuca of InsideDefense.com reports that Navistar CEO Dan Ustian is cautiously receptive to the idea, agreeing with Icahn that there may be synergies in integrating the military and commercial truck operations of the two companies. Bertuca notes that Oshkosh management is less favorably disposed, and has urged shareholders to reject a slate of candidates Icahn proposed for its board.
The reaction of Oshkosh executives is easy to understand: their company is only about half the size of Navistar and thus would gradually lose its identity in the operating culture of the larger enterprise. The company finds itself in this predicament because it made some ill-timed acquisitions at the top of the sub-prime real estate boom (most notable lift-maker JLG), and then sought to compensate for its error by bidding very aggressively on Army truck contracts. It won the contracts and by most accounts is performing well, but profitability has been hard to sustain. Oshkosh executives apparently thought they could win more favorable terms on the Army work by proposing design enhancements, but the customer insisted on sticking with the original contract terms.
Personally, I think the synergies that Icahn anticipates from a merger are imaginary. Investors would make a quick killing and then move on, leaving workers in Wisconsin and elsewhere to fend for themselves. But workers would not be the only victims of the deal. Following its successful experience in rapidly securing armored trucks for overseas wars from commercial truck builders, the U.S. Army has been warming to the idea that it can buy more of its vehicles from non-traditional suppliers — companies like Navistar, Oshkosh and Ford. The thinking of Army officials is that companies that operate in the commercial marketplace are more efficient and responsive, capable of tapping economies of scale not available to the military’s captive supplier base.
That reasoning isn’t necessarily wrong, but it ignores the loss of control implied for the Army customer. When you are by far the biggest source of demand for a company’s products, then you can pretty much dictate the terms of the relationship. When you are only one of many customers, you have less influence over how managers and investors choose to deploy their capital. In the case of Mr. Icahn, he doesn’t much care what the long-term consequences of combining Oshkosh and Navistar might be for the price and performance of Army vehicles, because he is motivated by near-term financial results. The fact that submerging Oshkosh into the Navistar culture will give the Army fewer competitive options in the future is fine with him; that’s how you get pricing power. So even before the Army’s strategy of relying more on commercial sources for its vehicles has fully coalesced, the marketplace is sending a signal that there may be consequences service officials hadn’t considered.