The billionaire financier's brand of rabble-rousing may not be what the cell-phone maker needs to reverse its recent slide
It's one thing when billionaire Carl Icahn tries to shake up a troubled airline or a distressed drugmaker. But when he set his sights on cell-phone maker Motorola, many were left asking—had matters gotten that bad in Schaumburg?
Icahn, who's lapped up 33.5 million, or 1.4%, of Motorola (MOT) shares, wants a seat on Motorola's 13-member board of directors, the handset maker said in a Securities & Exchange Commission filing Jan. 30. If he gets it, what's he likely to do there, and is his brand of rabble-rousing what Chief Executive Ed Zander needs most?
Judging from the 6.2% jump in Motorola stock the day Icahn's effort was made public, some investors would respond with a "yes." These aren't exactly the best of times at Motorola. The company's shares have been under pressure amid evidence that price competition with rivals such as Nokia (NOK) is taking a toll on margins.
On Jan. 19, Motorola said operating earnings in the fourth quarter fell by 56% and that operating margins were 6.3%, a far cry from the 15% goal Zander set early on in his tenure at Motorola. Sales of the KRZR, successor to the popular RAZR, failed to rise as much as some hoped. And competition may gather steam with the announcement of new touch-screen phones from Apple (AAPL) and LG that could grab market share from Motorola (see BusinessWeek.com, 1/12/07, "The Real Genius of Apple's iPhone"). Motorola's stock has tumbled nearly 27% from a 52-week high in October.
Zander had gotten the message, saying this month he would lay off 3,500 workers and promising to get back to double-digit margins in 2007 (see BusinessWeek.com, 1/19/07, "Shifting Gears at Motorola").
That's not enough, say some shareholders—least of all Icahn. The investor couldn't be reached for comment, but analysts speculate he'll push the company to sell off businesses or use some of its cash to buy back stock or raise dividends. In late 2005 and early last year, Icahn tried to force Time Warner (TWX), the owner of troubled AOL, to break into four separate businesses and dispose of its publishing assets. He dropped the campaign only after Time Warner management agreed to cut costs and buy back billions in stock (see BusinessWeek.com, 3/27/06, "After Icahn's Exit").
Lawrence Harris, an analyst with Oppenheimer & Co., says Icahn may try to persuade Motorola's board to sell the business that sells set-top boxes and cable modems, contributing 8% of total revenue and 9% of operating earnings. Or he may push for a divestiture of Motorola's Networks & Enterprise unit, which specializes in wireless broadband gear such as WiMAX and accounts for 27% of sales and 32% of operating profit.
But is that the medicine Motorola needs most? In a recent report, Harris says it isn't. By selling its Connected Home unit, Motorola would lose a major future growth engine. In the fourth quarter, the business registered its best quarter since 2000. Its income has been growing at double-digit rates, and the business is expected to benefit as telecom stalwarts Verizon (VZ) and AT&T (T) ramp up expansion into TV services over high-speed Internet connections.
Nor would selling the network division be such a good idea, Harris says. The business just recorded its best year ever, Motorola said Jan. 19. The unit expects sales growth at a percentage rate in the midteens this year. But it's not just a sales engine. The business is tightly integrated with Motorola's bread-and-butter mobile devices business, Harris says. So a divestiture would not only deprive the company of a fast-growth business but could also have an impact on handset sales.
Harris believes that an Icahn-supported share repurchase expansion, designed to prop up Motorola's sagging share price, is more likely to gain wide support. In the fourth quarter, Motorola bought back about $700 million worth of stock. Currently, the company plans to spend another $3.8 billion on share repurchases through June, 2009. But an acceleration of the repurchase rate could be doable, Harris figures, as Motorola holds about $11.2 billion in cash as of yearend.
But the company could use cash to build up its business in emerging markets such as India and China, where Nokia has been coming on strong, or in Europe, where Sony Ericsson has stepped up its attack.
Icahn's focus is likely more on the near term. "When you have a talented financier like Icahn who goes on the board, you have the concern that his view will be short term," says Michael Mahoney, managing director with EGM hedge funds, which don't own Motorola shares. "Motorola overall is heading in the right direction," he says. "I'd hate to have the board move in the direction of financial measures that will be beneficial short term but nearsighted long term."
The High End
The Jan. 30 share rally aside, Icahn may not find enough dissatisfaction with Motorola's board to win a seat, says Albert Lin, an analyst with American Technology Research. While shareholders are unhappy with the company's latest results, "I don't think investors are necessarily upset with the board," Lin says.
However Icahn fares, the pressure is on Zander. Motorola is in dire want of a new cell-phone best seller and needs to invest more in its brand and product design. "They need to come up with a product that can leapfrog the competitors like the RAZR," says Lin. "The real problem is, their products just don't stand out."
Particularly, Motorola needs to put special emphasis on releasing more high-end phones. Its mass-market success with the popular RAZR phone may have backfired in that the company is no longer perceived as a high-end brand, says Lin. And that's dangerous, particularly as Apple is gearing up to attack the $250-plus phones market segment with its iPhone, due out in June.
As Motorola tries to find a delicate balance between fixing its business in the short term and growing it in the long run, shareholders' decision to reject Icahn's nomination or approve him to the board could have far-reaching consequences.