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September 14, 2012

Disaster du Jour at Navistar

Well, things move apace in the boardroom battle at Navistar. The fire started with Carl Icahn’s open letter to the Navistar Board has indeed flared with the gasoline of the abrupt response by the corporation. There’s absolutely no doubt Icahn’s use of “amicably” in his settlement terms is a somewhat misused version of the word. Icahn is plainly furious.

Personally, I have to wonder why it has taken Icahn so long to get his dander up. But I suppose when you’re a billionaire, a $330.9 million investment, made just over a year ago, going down the tubes is something you put on the back burner until it boils over.

Well it has.

The Navistar Board has reacted slowly and altogether predictably, firing Dan Ustian – at last – and then sitting back on its hands as it has for the last four years as Ustian took the company down the wrong technology road, leading to abject failure in meeting EPA2010 with a compliant heavy-duty engine. The substance of the first response to Icahn’s wake-up letter of September 9 was that the company is now on track with a clear path forward.

Icahn is clearly infuriated by that. In his second letter September 11, he wrote: “After years of supporting a failed strategy, squandering corporate assets, overpaying underperforming executives, watching share price and market share consistently decline and, in my experience, making every possible effort to avoid engaging with shareholders in a meaningful dialogue about the future of this company, this Board is asking for a chance to implement their latest ‘clear path forward’ at Navistar. It is a chance shareholders cannot afford to take. After all, this is the same Board that proved fully capable of spending our money to open a new, gold plated corporate headquarters, but failed to develop an engine that could meet EPA standards.”

Other amicable remarks include: “It appears to me that the old management team received unwavering support from this Board, and in particular from this Board's executive committee, right up until the point where it began to endanger Board members' jobs. Only then were they willing to do anything about it, and even then they were not willing to find a permanent management team or have an open discussion with shareholders.”

And, he continues, “What has happened at Navistar over the past three years is not simply a matter of poor business judgment – as far as I am concerned it represents a blatant, ongoing disregard for the success of the company and a long track record of ignoring the perilous situation the company is in, while rewarding the strategy and management team that got us here. In my opinion, by damaging our company and its prospects, the Navistar Board has also exposed itself to significant risk of personal liability both as a result of its continuing reckless disregard for the needs of the company and the requirements of its business, and by adoption of a poison pill in the unique circumstance existing at Navistar.”

To see the full fury, go to and see what Icahn REALLY thinks of the Navistar Board. It makes compelling reading.

Now, further to my comment in the last post concerning how other senior executives may fare post-Ustian, it seems Dee Kapur, Truck president and only a few months ago promoted to vice chairman, is now Kaput, to borrow from Oliver Dixon’s highly amusing post. His departure has been met with far less fanfare.

In all this, to my mind the people hurt most are not the investors but the customers who go sucked in to purchasing the worthless trucks. And I use the term advisedly. John Barnes, who is Director of Operations for Commercial Transload of Minnesota Truck Lines wrote in an e-mail, “It is a total disaster and now the trade values [for these trucks] are so bad you can’t give them away.”

It is absolutely certain Barnes is not the only frustrated fleet manager – or even owner-operator – out there struggling with trucks they can’t use and can’t sell. They are massively out of pocket and have no idea where to turn. I have heard rumblings that some larger fleets are planning to file suit against Navistar, and I would love to put some names in a future blog so we can get an idea of where this activity may be going.

If you care to share your experiences with these trucks, as John Barnes has, I’d love to hear from you. E-mail me at

September 10, 2012

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.