Let the Games Begin

One of the four major Navistar investors, billionaire Carl Icahn, has sent a letter to the Navistar Board members blasting their inactivity and lack of fiduciary management over the last three years as the Navistar stock price plummeted from $60 a share to a little more than $21.

Icahn is demanding a board seat for himself and three others who, between them, own 60% of Navistar common stock. No one can own more, due to a “poison-pill” provision that Icahn describes as “unusually restrictive.”

Icahn says under Delaware law, board members may be personally responsible for the company’s performance under the “prior CEO.” That, of course, is a reference to former Chairman, President and CEO Dan Ustian who retired recently. More and more it’s looking as if he was pushed, as part of his $14 million-plus severance includes $25,000 for outplacement counseling.



Icahn says he is prepared to fight for board representation: “I would prefer to amicably resolve this matter now, rather than through protracted litigation and a proxy fight. However, I am sure that you have no doubt that I will proceed with both, if necessary, to protect my investment and the interest of all shareholders. In that regard, we are preparing and will soon deliver to Navistar a demand under Section 220 of the Delaware General Corporation Law seeking access to corporate documents and Board proceedings at Navistar. Given the recent history of the company they should make interesting reading!”

Navistar Board’s response is that Icahn should put his threats where the sun doesn’t shine.

Judging from the tone of the open letter, Icahn is outraged that the board has changed technology direction and top management without discussing the moves with any of the four major investors. He is particularly scathing in his remarks about incoming CEO Lewis Campbell who, he says, “has a questionable track record at Textron” (his last post).

“At Textron, over an 11-year period,” he says, “Campbell watched Textron stock go from over $37 per share to $20 per share, primarily because of a risky financial subsidiary, which lent money to a golf course and a time share project.”

Icahn questions Campbell’s lack of industry knowledge, too, lending weight to the rumor that he has been talking to others with far better credentials for running a major truck manufacturer.

Particularly gratifying to me is that in the list of transgressions is a condensed version of my “Told You So” blog that I posted when Navistar’s about-face on SCR was announced in July. As well as the list of spending on failed technology; litigation against suppliers, competitors and regulators; and developing marketing plans to convince customers of the compliance of non-compliant engines, Icahn points to the new corporate headquarters in Lisle, Ill. I wrote …“the new corporate Ivory Tower in Lisle, Illinois. Another questionable decision…” Icahn calls it “a gold-plated corporate headquarters that cost over $100 million.” Same, same.

This spoiling for a fight might lead to some very interesting changes in direction. Again.

Only a few days ago, Lewis Campbell, Troy Clarke – Navistar’s new Lewis and Clarke team – and CFO Andy Cederoth reaffirmed Navistar’s roadmap from wilderness to recovery. This included sticking with the 11- and 13-liter MAN-derived MaxxForce engines with SCR technology, as well as adding the Cummins ISX 15. Nowhere was there any mention of the 15-liter based on Caterpillar mechanicals, confirming it as a dead duck.

They did say, though, that Cummins has a team co-located at Navistar to speed the adoption of the Cummins Emissions Solutions technology.

You may wonder, as do I, why Navistar would embrace so completely the Cummins Emissions Solutions to help it through its current heavy-duty engine emissions challenges. After all, Navistar has SCR on its MWM engines in Latin America and the company even showed an Indian-partner SCR Mahindra cabover in its booth at the Mid America Trucking Show in Louisville in the spring – another $2 million of investors’ money. The legend board proclaimed it the “Direction of the Future.” How prophetic! Within months Navistar would embrace SCR. But at the time, it was an embarrassment for Navistar. When industry watchers climbed over the truck and discovered the aftertreatment technology, the access door to the DEF tank was hastily and crudely screwed shut!

Obviously, since Cummins is back in the fold, there will have to be some Cummins aftertreatment on-board Internationals with ISX15 and, maybe, even 12.9-liter power, so why not go whole hog and make all the engines work through the same system? That’s not at all an unreasonable direction and would be a quick fix-to-market for the MaxxForce 11- and 13-liters.

But there’s another take from a Navistar competitor and industry source who is great at calling it like it is. The word there is that the in-cylinder plus technology (ICT+) will never see the light of day. Navistar is hemorrhaging and the fastest way to stop the blood-letting on the engine side is to pull the 11- and 13-liter (and the stillborn 15-liter) to just cut the losses. All heavy-duty power will be from Cummins as in days of old with the ISX 12.9 filling in for the 13-liter MaxxForce. The company will stay in the medium-duty engine business but abandon the MAN-derived engines altogether, shutting down and mothballing its Alabama engine plant and letting go a bunch of production and engineering folks as part of its current desperate headcount reduction and cost-cutting.

Ustian’s departure allows for the blame to be assigned to him as Icahn says in his letter. Lewis and Clarke get the credit for charting the new course. And maybe some of the old guard gets to stay under the new leadership with a new roadmap. Just who from the old guard gets to remain is an interesting field for speculation.

That’s a not-unreasonable take on the possible fall-out and one that’s not so unlikely. Wall Street would likely fall all over it. The investment community loves to see aggressive cuts.

Caterpillar wouldn’t fall all over it, however, as it's the 13-liter MaxxForce that’s in the current Caterpillar CT660 truck. And the eagerly anticipated 15-liter, based on the Caterpillar C15 iron, was to be the big power for Cat trucks in North America. It might have helped the somewhat dismal sales of the CT660, which is currently running about one a day if industry reports are to believed. Nobody sees Caterpillar bellying up to Cummins 12.9- or 15-liter power any time soon. And that may put in jeopardy the entire Cat/Navistar worldwide marketing pact.

I thought with the announcement of the technology and corporate about-face the whole sorry saga was finished. But no. As it turns out, it was just the first salvo in what may be a long and bloody battle with an outcome as yet impossible to call.