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.