Well-known investor Carl Icahn has been agitating for various changes at specialty commercial and defense truck manufacturer Oshkosh (NYSE:OSK) for some time now. On October 10, 2012 Mr. Icahn ratcheted things up a notch - making an offer to the company's board to take the company private for $32.50 per share in cash. Should investors push the board to cash out, or should they hope that the board rebuffs Icahn and continues on as an independent publicly-traded company?

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The Bid
Word came out Thursday that billionaire investor Carl Icahn has approached Oshkosh with a nearly $3 billion all-cash bid that values the company at about $32.50 per share. Coincidentally, Icahn is also pushing ahead with a plan to nominate a slate of his own directors.

So far Oshkosh management has said essentially nothing; the company acknowledged the bid, advised shareholders to take no action, and indicated that a response would be forthcoming within 10 business days. It is worth noting that Icahn already owns a bit more than 9% of the shares of Oshkosh.

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Are Oshkosh's Problems Cyclical or Structural?
Icahn seemingly doesn't get involved in companies where he's happy with management (or at least his involvement is much quieter), and Oshkosh is no exception in that regard. In particular, Icahn has been dissatisfied with the pace and scale of restructuring efforts at Oshkosh, as the company attempts to cope with major declines in the defense business and ongoing sluggishness in its commercial, fire/rescue and construction operations. It's also worth noting that it wasn't so long ago that Icahn was openly calling for a merger between Oshkosh and Navistar (NYSE:NAV).

As generally seems to be the case, Icahn has at least something of a point. Despite a strong position in tactical trucks and the simultaneous wars in Iraq and Afghanistan, Oshkosh has struggled to replicate the margins it produced during the housing boom of the mid-2000s. Likewise, returns on capital and free cash flow generation have turned wobbly and volatile, and the stock is well below its 2007 highs.

Certainly Oshkosh has had some issues. The company paid too much for JLG (aerial work platforms) and bought the company at almost the absolute wrong time; profits are still just a fraction of the prior peak. At the same time, state and municipal budget issues have hurt the fire/rescue businesses, and the lack of lower-priced offerings has hampered emerging market penetration. In addition, leadership relative to companies like Terex (NYSE:TEX), Manitowoc (NYSE:MTW), Miller (NYSE:MLR), Dover (NYSE:DOV) and Navistar in its non-defense businesses just hasn't translated into notably superior performance.

MOVE or Move On?
Management has not exactly been ignoring the situation. The company has launched its MOVE strategy, which is designed to optimize the company's capital structure and cost efficiency. It's not always easy to show significant cost improvements during cyclical lulls, but stripping costs out of the manufacturing process ahead of improving volumes in construction at least makes sense.

During its analyst day, management laid out plans that should see actions taken in FY2012 produce about 75 basis points of operating margin improvement in 2013, with even greater improvements in 2014 and 2015. In particular, management is targeting a doubling of margins in access equipment, mid single-digit margins in fire/rescue, and more than a doubling of commercial vehicle margins.

If the construction market improves, and the company doesn't lose meaningful share to the likes of Terex or Dover, this should be a powerful one-two punch. At the same time, management seems unwilling to just throw in the towel on the defense business. U.S. defense spending is likely to decline (and decline sharply if the "fiscal cliff" cuts kick in), but there's still debate as to how the remaining money will be spent. What's more, while the U.S. government is far and away the largest buyer of tactical trucks, it's not the only potential customer for Oshkosh.

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The Bottom Line
Even with the aforementioned improvements, I think Oshkosh will have to work hard to basically tread water for the next few years as improvements in non-defense businesses offset declines in defense-related volumes and profits. Nevertheless, I do believe that the company can produce mid-single digit revenue growth and mid-single digit free cash flow margin; doing so translates into about 6% free cash flow growth and a fair value in the mid-$30s.

As for the Icahn offer, I think it really comes down to a shareholder's appetite for risk. I think management has a better-than-average shot of hitting those targets and delivering free cash flow growth of 5-8% over the next decade, but there's still a possibility that it will fail (and/or that the construction/commercial vehicle recovery is weaker and more protracted). By comparison, while Icahn's offer likely leaves a couple of dollars on the table, it is a basically risk-free opportunity to cash out at a price that's at least in the realm of fair.

At the time of writing, Stephen D. Simpson did not own any shares in any company mentioned in this article.