Icahn's raid gets no respect from Clorox or the market

Investor Carl Icahn, who besieged General Motors, Yahoo and dozens of other companies over three decades, has dragged his trebuchets to the walls of Clorox Co., maker of toilet-bowl cleaner.

Last month he offered $10.2 billion to buy the company, which manufactures liquid bleach in Aberdeen. He raised the deal to $10.7 billion after Clorox's board told him to get lost.

It's an "unsolicited bid," as the financial press described it, although this goes without saying. You invite a takeover offer from Icahn no sooner than you solicit a case of shingles.

Having been rejected again, Icahn now suggests shareholders fire the entire Clorox board and replace it with his nominees, including Maryland's A.B. "Buzzy" Krongard, formerly chief of Alex. Brown Inc. and later executive director of the CIA.

The scene is set for a nasty proxy fight in which both sides will blow money on consultants and lawyers as they seek shareholders' votes.

If Icahn gets his way, Clorox would either be sold to some monster competitor like Procter & Gamble or run by a CEO of his choosing. Either way, debt would probably rise, costs would be cut and employees would lose jobs, most likely in middle management.

Given that Clorox's incumbent team is doing a decent job and the economy has seen quite enough of debt and layoffs, I know whom I'm rooting for.

Even before Icahn's offer, Clorox stock was trading at about the same levels as in 2007 and 2008, before the financial collapse. You can't say that about most stocks. It pays a dividend of 3.5 percent. You can't say that about most stocks, either. That's more than you get from the interest on a 10-year Treasury note.

Consumers need to kill germs even in a recession. They must take out trash, change cat litter and clear clogged drains. So bleach, Pine-Sol, Formula 409, Glad bags, Liquid-Plumr and other Clorox items are bucking the economic cycle, as household products often do.

Sales and profits have risen gradually since Clorox CEO Don Knauss took over in 2006. Besides paying dividends, the company has been buying back its own stock, which increases earnings per share. Unlike some companies investing in their own stock, Clorox isn't weighed down by too much debt.

Icahn is unhappy that the stock and profits aren't higher. Since the 1980s, his modus operandi has been to buy big blocks of shares in companies he believes are undervalued and then agitate for change — either from the outside as a dissident or from the inside with board seats.

On the whole he seems to have been rather successful. Forbes magazine says he's worth $12.5 billion.

It's true that Clorox's profit margins have declined as a result of rising raw-material costs. But Clorox's team is raising prices to compensate — easier said than done when your business depends heavily on Walmart, which hates price increases.

Clorox has a good record of innovation. It launched the successful Bleach Pen in the early 2000s. Environmentally friendly cleaners called Green Works, introduced in 2008, have reportedly done well. The company just updated the Glad bag. And its portable Brita Bottle, which filters tap water and is intended as a greener and cheaper alternative to bottled spring water, is a great idea.

Clorox stock has generated average annual returns of about 6 percent over the last five years, counting dividends and price appreciation. That's better than Procter & Gamble and of course much better than the rest of the stock market. But Clorox's performance is far behind returns from Unilever and Colgate Palmolive.

Icahn's Clorox raid isn't getting much respect, and even he seems to understand that his offer isn't that great. He's offering $80 a share, but Clorox closed Monday below $70, suggesting that few investors believe he'll be successful. Icahn has urged the company to seek somebody else to beat his deal.

In another recent foray — this one against Forest Laboratories — Icahn lost badly. Forest shareholders elected all 10 of the drug maker's board nominees this month — and none of his.

If he achieves the same outcome at Clorox, the world won't be much poorer.

From society's point of view, there may be a long-term benefit to raiders like Icahn. By pushing corporations to make more with less, raiders boost productivity along with stock prices.

The added wealth raises the value of pension funds and workers' 401(k)s. As a country gets richer, capital gets invested to re-employ the workers displaced by corporate raiders and buyout artists.

That's the theory, anyway. But these days it's hard to argue that the economy's problems are inadequate corporate profits and excessive employment. I'm raising my Brita Bottle in a toast to Don Knauss and the Clorox board, brewing hot tar behind their battlements.


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