Tuesday, February 06, 2007

Exciting Days in Takeover-Land!

"What's exciting is when you buy them when no one wants them,"

—Carl Icahn to the Wall Street Journal

Carl’s back. As reported in today’s Journal,

Carl Icahn is making a $2.75 billion bet that battered U.S. auto-parts suppliers are poised for a comeback.

His rationale?

Mr. Icahn said the beaten-down share prices of auto suppliers like Lear have made them attractive values.

"What's exciting is when you buy them when no one wants them," Mr. Icahn said in an interview [emphasis added].

And truer words word never spoken: it is exciting to invest when nobody else sees the value, or wants to take the risk that that value will be realized some time in the uncertain future.

But, according to my Bloomberg, the time when nobody wanted Lear—which happens to be one of many auto suppliers struggling to make something out of a commodity business under severe price pressure with a high cost union work force—was a year ago March, when the stock bottomed at $15.60.

Not yesterday, at the $34.20 opening price before Icahn’s bid got even fewer people not wanting the shares.

Now, I understand that when Carl Icahn walks into any room, he is very likely the wealthiest individual in that room. And his record for creating value for himself and his investors ranks up there in the thermosphere of all-time great investors.

But by my calculation, nearly $1.5 billion of potential value has already been absorbed by public shareholders who ventured to buy Lear when the stock was being thrown out in the mid-teens—the time when “no one” wanted to own poor, suffering Lear.

And grey-hairs will remember another company Carl Icahn bought “when no one wanted to own it.”

That company was TWA.

And Icahn’s tenure over that veil of tears turned out to be merely one of several times “no one” wanted to own what was, in the end, a commodity business under severe pressure with a high cost union work force.

Let the excitement begin!

Jeff Matthews
I Am Not Making This Up

© 2007 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.


Its_strange said...

NY Post reported Icahn just sold all of his TTWO shares. 2.9 million shares.

MyDailySlice said...

How true!

John Novak at Morningstar wrote his analyst thesis on 4/17/06 reasoning why LEA was a buy at $16+/-. He has LEA's fair value pegged at $45, so Icahn will most likely see some green out of this.

whydibuy said...

Its deja vu all over again. David Stockman's heartland Partners bought control of Collins and Aikman in '00 I believe calling a bottom then to the auto supplier woes. Bankrupt... OOPS. Lesson learned; commodity businesses are inherently cutthroat and difficult to turn a profit in. Then came Delphi's bk and Kirk K. buying Generous Motors, also calling a bottom. Not quite but he did get out whole apparently. It seems these co's are cheap untill you step back and realize that there are a billion people in the world unemployed or underemployed who's addition to the world workforce will keep constant deflationary pressure on prices of things for the foreseeable future IMO.

Brian said...

Icahn may be late to the party, and could very easily just be looking for a bid for the shares he bought at $23 a few months ago, but Lear, or what is left of Lear, is definitely not a commodity business. The seating and electronic businesses have solid competitive advantages which have allowed Lear to withstand, not without some damage mind you, the storm that has enveloped the auto supplier industry. These advantages are reflected in the consistent market share and generally strong return on capital numbers for both segments. The seating industry especially is quite attractive from a market analysis.

The prevailing thought that all auto suppliers are in a commodity business is what allowed investors to buy LEA in the teens less than a year ago, and to make a decent profit today (after a few sleepless nights).

tahoe kid said...

TWA - Who could forget the famous "Light Bulb Bonds" that Icahn sold to help finance TWA?

Sam E. Antar said...


Beware of “take over artists" with huge egos, plenty of arrogance, and a lot of persistence.

Does anyone remember the Zinn-Palmieri Committee to "create shareholder value” and the group’s historic takeover of Crazy Eddie?

What they found was an empty hollowed out shell of a company.

You need more than ego, arrogance, and persistence to be a good take over artist. Hopefully you have mastered a skill you should have learned in grade school. It’s called homework. Be very good at it.


Sam E. Antar (former Crazy Eddie CFO & convicted felon)

PS: Jeff, I speak from experience on this.

NM said...

I really enjoy reading your posts, Mr Matthews, but I believe the expression is "vale of tears".

Dave Livingston said...

Jeff - another interesting post. Between you and your readers always worth checking for another perspective. Three observations might be worth adding to the stew here, riffing on Brian and Sam's. Let's remember when Wilbur Ross got into steel though - a dying/dead industry. Actually one that had a sound basis and with the 'unanticipated' changes in the new global economy a real strategic future. But as constituted. So, might it be fair to say:
1. Auto industry is on the verge of the biggest re-factoring transformation of an industry ala Steel ? Which will require all the players to re-engineer themselves on products, strategy, operational execution and mgt systems ?
2. Lear may be well positioned as the Big3 transform by having superb manufacturing and outstanding product development (which seperately I believe to be true).
But....are they positioned to ride the waves over the next decade ?
3. As Captain Kirk pointed out NOT doing one's homework on firm, industry and structural trends tends to make one lucky just to get back to whole.

Haven't seen anyone work their weigh thru all that yet.

Robert said...

And I too really enjoy reading your posts. But if you headline an opinion with "Icahn" but do not reference his ridiculous investment in WCI, I fear I may stop reading for fear you too have been duped.

Anonymous said...

"Carl's back."

I never knew he went away.

Reading your post Jeff got me thinking about whether auto parts suppliers are, like the airlines, "...a commodity business under severe pressure with a high cost union work force"? I agree with you to a point. Following in the "footsteps" of both Brian's and Dave's analysis, isn't it possible that auto suppliers like Lear have a competitive advantage (i.e., economy of scale, few competitors) that airlines do not (i.e., volatile fuel prices, no pricing power)? Could auto parts suppliers like Lear undergoing structural industry challenges find a way to increase their profitability (i.e., free cash flow) and reduce their long-term debt load, even when buyer power from auto manufacturers like GM wanes with a slowdown in auto production?

The closest company "rebirth" that comes to mind is Magna which, like Lear, is also an auto parts supplier. I encourage your readers to look closely at Magna's "story" and ask themselves whether such a "happy ending" can happen for Lear under Mr. Icahn?

I don't know one way or another, but I could be wrong in my analysis.

Roger Fritz said...

Building on what others have said:

#1 Lear is quite different from an airline. First off in the airline industry entry costs you very little. Lease a plane or two and you are in. Virgin entered the airline business with no business plan and no venture capital backers.

In the auto industry, you'd need to build huge plants, find skilled workers, AND develop relationships with seven or so customers that may or may not cost you.

#2 Lear is also different from Collins and Aikman. C&A makes products that are small, and easilly shipped and thus quite vulnerable to lower cost forgeign competitor. Shipping charges make the outsourcing of seats much more costly.

Most seats in the U.S are made by either Lear or Johnson Controls. That's not a commodity, that's an oligopoly!

I personally feel that Ichan is stealing the business at $36 a share. The stock overtime, is worth at least $60.