Motorola: Cut Icahn’s Interference

CEO Edward Zander should resist activist investor Carl Icahn’s pressure to spend the electronics giant’s cash on a stock buyback. Pro or con?

Pro: Save the Cash for R&D

Granted, Motorola’s (MOT) predicament calls for decisive action on a grand scale. Its Razr, once the hottest thing on the cell-phone market—even when it was selling for $499—isn’t quite ringing consumers’ bells these days. The model now retails for just a tenth of its former price tag. That’s just one of a number of reasons the Schaumburg (Ill.) company has forecast a quarterly loss and a $1.2 billion revenue shortfall, its first sales decline in four years.

Fortunately, Motorola is still harboring plenty of cash, enough to revitalize itself. Too bad Carl Icahn is pressuring the company to use its money for his own misbegotten plan.

The investor, who holds a 2.7% stake in Motorola, wants CEO Edward Zander not only to hand over its entire $9 billion cash stash to buy back stock but also to mortgage future cash flows by taking on debt to fund even more buybacks. After the company disclosed Icahn’s initial stake on Jan. 30, he called on the board to buy back up to $15 billion in stock.

Such actions would set a dangerous precedent in the annals of investor activism. More troubling is that it would rob Motorola of funding for what it really needs: R&D, acquisitions, or both. The company needs to do whatever it takes to find and market products to compete with Research in Motion’s (RIMM) BlackBerry Pearl and Apple’s (AAPL) upcoming iPhone.

Nonetheless, in a March press release, Motorola said it had executed an immediate $2 billion buyback and committed an additional $3 billion to future repurchases. Some advice for Zander: Don’t go one dollar further into Icahn’s plan.

Let Carl and his aggressive stockholding ilk toy with more mature companies—say, a food producer with the anchor of a few timeless products. Technology outfits like Motorola live and die by the cutting-edge newness of their offerings. And stock prices don’t drive innovation.

Con: Trust a Winner’s Voice

by BW Staff

Perhaps those who hastily lambaste Carl Icahn’s proposal for Motorola should consider the man’s history as an investor.

Icahn began his Wall Street career in 1968, when he took a job as a stockbroker at Dreyfus. He later borrowed money to buy a seat on the New York Stock Exchange. In the 1980s he led successful takeovers of Texaco and USX—and managed to survive the decade’s junk-bond meltdown without a trip to jail or bankruptcy court. Today he has ownership interests in the Stratosphere casino, Adventrx Pharmaceuticals, and National Energy Group (NEGI), among other organizations. His net worth is estimated at $10 billion.

If anyone knows when to buy, sell, and borrow, it’s Carl Icahn. And he’s not the only one who thinks it’s time for Motorola to use its cash and credit for a stock buyback.

“I will be one investor who will be listening to Icahn,” says David Morra, a former CEO of a medical services company who has held Motorola stock for 12 years. “With a net return of 5.67%, Motorola has been a bad investment. Add the paltry dividend, and it is still a bad investment. I hold on only with the hope that Ichan can stimulate management and the board into action.”

Yes, the company needs money for R&D, but ignoring stockholder frustration would be a bad move. Putting cash into investors’ hands would surely raise Motorola’s esteem on Wall Street. Icahn believes the company is undervalued.

Investors have been patient with Motorola long enough. The company can no longer enjoy the luxury of stalling for time while figuring out a new plan. “In life and business, there are two cardinal sins,” Icahn has said. “The first is to act precipitously without thought, and the second is to not act at all.” He believes Motorola is in danger of committing the latter. Edward Zander may be smart to heed his warning.

Opinions expressed in the above Debate Room essays are provided for the sake of argument and do not necessarily reflect the views of BusinessWeek, BusinessWeek.com, or the McGraw-Hill Cos.

Reader Comments

steve

It's not personal, it's business. Got to do one or the other. It's time to increase shareholder value now.

Jun

Let's think about why companies exist. What they have to do is to increase value for customers, shareholders, and employees. I guess the company needs to trust the investor's voice.

Alex Gajano

It seems a bit short-sighted to increase shareholder value with a stock buyback given the uncertainty in the air for MOT. The company needs a long-term strategy to get back on top and deliver true value to stockholders. I say hold on to the reserves, and tell Mr. Ichan to stop with the backseat driving already.

Kevin

I say a stock buyback would be a good move. Since Zander took over in 2003, his goal has been to gain market share, which he has done. As MOT has gained significant ground on Nokia in the market, why not buy some stock back? This should raise the price of the stock, which typically leads to more investment in the company.

Some debt is fine as long as your debt ratio doesn't get too bad. MOT will continue to have access to funds for R&D as long as its stock value keeps going up.

Zander has done a good job at being innovative, as the new MOT phones are much cooler than they used to be. He has enabled the company to gain market share. Now it is time to give back to the investors who have stuck around.

Brian

One option is for MOT to just fritter away all of its assets (like it has been doing). If MOT can't hack it in this market, it would be better to give shareholders something now than nothing later.

Ellen

Anyone here think about doing business in the China stock market? It is hectic and speculative, especially this year.

A. Cude

"Zander has done a good job at being innovative, as the new MOT phones are much cooler than they used to be."

I wasn't aware that being "cooler" was a requisite for a leader. Ed Zander wasn't named the CEO of the year in 2006 because he was "cool." It was because he was a visionary and wise. I know this, because I know Ed personally. You cannot pass judgment on the man and his ability to resurrect Motorola on public opinion. Stand back and watch. Ed will once again respond to adversity and elevate Motorola to the leader in the communications industry it has dominated for the past two decades.

mighell

It is the problem of its sales and R&D.

joe

I was at Motorola for 15 years before it decided to sell the group I was in to an auto company. During that time, I made it through no fewer than eight layoffs and watched the morale of my fellow workers go down the drain as it continues to this day. The Razr was already on the drawing board long before Zander ever showed up. Just look at Zander's compensation vs. the average engineer's, and you can see why Ichan just might have a better idea. Many investors have watched as the money they invested has been stagnant for the last few years or declined. It's time for change.

joe

I was at Motorola for 15 years before they decided to sell the group I was in to an auto cpmpany. During the that time I made it through no less than eight layoffs and watched the morale of my fellow workers go down the drain as it continues to this day. The Razr was already on the drawing board long before Zander ever showed up. Just look at Zander's compensation and the 400-times pay versus the average engineer and you can see why Ichan just might have a better idea. Many investors have watched as the money they invested has been stagnant for the last few years or declined. It's time for change.

motnokia

Obviously, the main reason Ichan wants Motorola to buy back the shares is so that he can dump the stocks and cut his losses. Buying back Motorola shares does not improve Motorola's long-term competitiveness in any way. From Ichan's point of view, this probably doesn't matter anymore as he's selling the company stocks. So if your argument here is whether buying back stocks will help Motorola's long-term competitiveness, I would say it's an obvious no. However, if your argument here is whether it will help investors get rid of Motorola shares, then I would say it's a yes.

THE HAR

The leadership is great at Motorola. But the employees are going to take this company to higher heights and put egg on a lot of their competitors, Motorola has, in my opinion, the best team workers around. They will step up and hit home runs when everybody else is thinking strikeouts. This underdog can pack a nasty bite when it is put into a corner. Beware, I am putting the sign up: "Be Alert. A Bite Can Happen at Any Time."

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