Lear Has Some Explaining to Do

Management has some explaining to do to shareholders. Rossiter, who stands to make $20 million if shareholders approve the Icahn bid, claims "significant value" based on a multiple of 2007 operating earnings. However, in an Oct. 26, 2006, earnings release, the company makes it clear that margins in 2007 will be well below "historical" levels.

It is misleading, if not disingenuous, to claim significant value for shareholders based on a multiple of below-normal earnings. By my calculations, based on company-provided numbers (see Lear's Oct. 26 earnings release), Rossiter applies the 9 multiple to core operating earnings that are 40% below normal.

Rossiter said last Friday that "we intend to solicit other offers to ensure that value is maximized for all of our shareholders." He needs to explain to shareholders, then, why Lear agreed to put up a sizable roadblock to other bidders -- namely, a $100 million breakup fee payable to Icahn. This fee is outrageous considering the buyout offer amounted to a 4% premium when it was offered and an 11% discount to market value when the stock was halted on Feb. 8.

Investors should take note of this warning issued by Pzena in his letter to Lear directors:

"The trend toward private equity firms teaming with management to 'steal' companies from their owners is alarming."

In my view, Lear's board of directors has failed to protect shareholder property for the reasons explained above. That leaves it to shareholders to protect themselves. In an upcoming vote, Lear shareholders will decide whether to sell their shares to Icahn for $36 per share or not. For this Lear shareholder, the decision on which way to vote couldn't be easier.