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Commentary: Activist Investors Not Welcome


Feed me, Zander!" growled the relentless shareholder. Motorola Inc.'s (MOT) chief executive shouldn't heed the demand.

With Motorola's cell-phone business tanking, CEO Edward J. Zander is under intense pressure to create another hit product like the Razr phone, or buy a company that can. Standing in his way is activist hedge fund manager Carl C. Icahn, who holds a 2.7% stake and is roaring for ever more cash, in the form of stock buybacks, to be thrown into his fearsome jaws. That puts Motorola at an existential crossroads.

It's one thing for activists to target, for example, a ketchup maker; a mature company that throws off tons of cash would be hard-pressed to argue against kicking some back to shareholders. But Icahn's engagement with Motorola is a different animal. As a high-tech electronics giant, it must invest a lot in research and development, especially as the 79-year-old company confronts slumping sales. Normally activist investors steer clear of such situations. Yet Icahn, who did not return several phone calls seeking comment, wants Motorola not only to hand over its entire $9 billion cash stash 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.

Monitoring the Motorola situation no doubt are a slew of aging tech companies with excess cash on their balance sheets that could soon find themselves facing activists. "I'm more concerned about all the management time and energy being spent on this when Motorola has to manage operations, innovate, and invest in research and development at one of the most challenging times in years," says Fitch Ratings Inc. bond analyst Nick P. Nilarp.

Motorola, which declined to comment, shouldn't cave in. Zander steered something of a revival after becoming CEO in 2004, thanks to the once-hot Razr phone and $6 billion in company acquisitions. Why give up and gut the balance sheet now? "It would be imprudent to leave the cupboard bare to lever up to buy back stock," says a source close to the company. "That's even more relevant in tech, where you need to stay fleet of foot for acquisitions and innovation. Without a balance, you're competitively vulnerable."

Motorola already is. On Mar. 21, the Schaumburg (Ill.) company forecast a $1.2 billion revenue shortfall and quarterly loss, its first sales decline in four years. Its margin on phones, which make up 60% of sales, plunged from 12% in the previous quarter to 4.4%. Meanwhile, Apple Inc.'s (AAPL) soon-to-ship iPhone and Research in Motion Ltd.'s (RIMM) BlackBerry Pearl are stealing center stage even as Pizza Hut (YUM) gives away MP3 phones. With the Razr costing a tenth of its $499 initial price, it's no time for Motorola to starve itself of the cash needed to create the next hit.

Yet Motorola is starting down that dangerous path. In its somber release, it said it had executed an immediate $2 billion buyback and committed an additional $3 billion to future repurchases. Even that won't likely satisfy Icahn, who disclosed a day later that he had raised his stake. A source close to Motorola worries that Icahn is after a major recapitalization, where the company takes out a big chunk of debt to fund more than $20 billion in buybacks.

You might expect analysts to be cheering the agitation. After all, as Icahn said in a recent letter to BusinessWeek, his campaigns have rewarded shareholders large and small. But his demands on Motorola are being met with a blend of puzzlement and irritation. "I never had a problem with the balance sheet," says M. Casey Ryan, an analyst with investment bank Nollenberger Capital Partners. "I wanted them to invest and focus on the high end with a hit phone, to build for the future." Ryan says Motorola should resist pressure to defer to Icahn. Adds Zhiping Zhao of research firm CreditSights: "I don't understand why Icahn set his sights on Motorola in the first place. And I don't know if he understands what he's getting into."

Since last July, the company already has spent $3.1 billion on buybacks. Yet its share price has fallen. Does Motorola know what it's getting into?

By Roben Farzad


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