Motorola v. Carl Icahn

The Wall Street Journal carried a short piece on the back of its Money & Investing section, in the 'breaking views.com' column. The writers, listed as Robert Cyran, David Vise, and Dwight Cass, are on record as stating,

"Carl Icahn doesn't deserve a Motorola Inc. board seat. His ability to bellow isn't enough of a justification to give him a directorship. He has already repudiated his one big idea for the cellular-telephone maker. Now he appears fresh out of ideas- and he is overbooked."

Further on in the piece, the authors selectively cite Blockbuster's loss of 'close to half' of its value since Icahn arrived on the board. In contrast, they provide one example, that of Nelson Peltz influencing Heinz to take actions, the alleged results of which boosted the stock's price 40%.

I don't propose to do an extensive analysis of Icahn's investing track record. However, by Googling Carl Icahn, I came across two interviews which suggest, in Icahn's own words, why the Journal writers are just plain wrong. One is this interview dated yesterday in Time Magazine. Here are some excerpts from that piece,

Do you accomplish anything besides making money?

(Icahn) Yes. America is going to lose its economic hegemony if we don't do something along the lines of what I'm doing, where you make managements accountable. Our companies are really not competitive with Asia, and this is the great new threat.

You're trying to get on the board of Motorola, which you think has too much cash on its books. Does CEO Edward Zander need to go?

(Icahn) I'm not looking to remove Motorola's board. I'm only saying that there's no reason for that company to be sitting with $12 billion of cash that would be better used by shareholders.

Why are you buying car-parts maker Lear?

(Icahn) I thought the American auto industry was dying. When most investors, including the pros, all agree on something, they're usually wrong. The number of cars being bought, with Asia coming on so strongly, will increase substantially over the next decade.

Last year you pushed for big change at TIME's parent, Time Warner--breaking up the company, ousting CEO Dick Parsons--but none of that happened.

(Icahn) Dick Parsons agreed to do what we wanted most--a $20 billion buyback of the stock. He did what he promised, and the stock is up 30%. That helps all shareholders. Our fund made $250 million. It's a nice way to lose.

I also found this transcript of CNBC's David Faber interviewing Icahn on Friday(Evidently done via some sort of voice-to-text program, given the errors. That's also why it is all caps.). It's worth using the link and reading all three pages of the transcript, but here are some pertinent passages, for purposes of my post,

FABER: IS MOTOROLA NOT BEEN LISTENING TO YOU, CARL? MY SENSE IS --

ICAHN: THAT'S NOT THE PROBLEM, DAVID. THE PROBLEM WITH MOTOROLA IS IT WAS SUCH A SURPRISE. EARNINGS WERE SO, WERE SO BAD, IT WORRIED ME A GREAT DEAL THAT, THE COMPANY HAD NO MEASURE WHAT THEY WERE DOING. JANUARY 9th THEY SAID MARGINS 8% WHICH IS HUGE. AND IN MARCH, ONLY TWO MONTHS LATER. THEY WERE NEGATIVE FIVE. MEANING THEY LOST 500 DRAL MILLION IN THE FOURTH QUARTER ON, THE, HANDHELD BUSINESS. THAT MADE ME WORRY QUITE A BIT ABOUT THIS COMPANY, ABOUT THIS BOARD. THEY CHANGED DIRECTIONS SEVERAL TIMES. AND, WHAT'S INTERESTING THEY KEEP COMING OUT, TODAY, FOR INSTANCE, AND TALKING ABOUT THE FACT THAT, THEY HAVE HAD, A GOOD RECORD BUT IF YOU LOOK AT IT THEY HAVE SORT OF OBFUSCATED FACTS. IN DECEMBER 04 AFTER THEY SPUN OFF FREESCALE. IF YOU PUT $100 IN MOTOROLA IT WOULD BE STILL WORTH, 100 MAYBE A LITTLE LESS. IF YOU PUT $100 IN NOKIA YOU WOULD BE WORTH $160. THEY HAVE DONE A TERRIBLE THE JOB AND THE BOARD HAS NOT DONE A DAMN THING ABOUT IT IN MY OPINION.

FABER: ORIGINALLY WHEN YOU AND I SPOKE ABOUT THIS WHEN YOU FIRST TOOK YOUR POSITION SEEMS LIKE YOU WERE LOOKING AT BALANCE SHEET SEEING AWFUL LOT OF CASH AND POSSIBILITY OF RETURNING THAT CASH TO SHAREHOLDERS. YOU SAID TO ME AT TIME. THESE GUYS ARE NOT MONEY MANAGERS. THEY SHOULD GO TO WALL STREET. THAT'S OFF THE TABLE RIGHT NOW, RIGHT?

ICAHN: IT'S OFF THE TABLE THE NUMBERS THEY SAID THEY WOULD COME UP WITH IN JANUARY THEY DID NOT COME UP WITH. IT'S A TREMENDOUS DIFFERENCE I CAN'T UNDERSTAND HOW THEY DIDN'T KNOW IT. IN JANUARY, THEY WERE TALKING ABOUT EIGHT, 9% MARGINS. TALKING ABOUT 3 1/2, 4 MAYBE YOU NEED SOME OF THE MONEY TO WATCH WHAT THE HECK IS HAPPENING ON HOME FRONT.

FABER: WE HAVE MORE TIME WE'LL GET TO THAT. LET'S TALK ABOUT THIS.

ICAHN: THE NAMES WOULD BE THE SAME. YOU JUST DON'T NEED ANOTHER BIG NAME GUY IN THE MOTOROLA BOARD, SORT OF FROM THE SAME COOKIE CUTTER. YOU KNOW THE BOHEMIAN CLUB, AUGUSTA GOLF CLUB. MAYBE I WON'T BE INVITED. MAYBE MY SECRETARY LOST MY INVITATION.THAT'S WHAT, THEY'RE TALKINGABOUT.AND YOU DON'T NEED THATHERE. THE -- INVITATION. THE TROUBLE IN THE COUNTRY THESE BOARDS DON'T HOLD THE EXECUTIVES ACCOUNTABLE. I DON'T THINK THEY DO THE JOBS AT ALL. ISSUE SAID HEY, IF YOU DON'T REALLY WANT ME ON I WOULD PUT ANOTHER LARGE SHAREHOLDER ON. THEY DOESN'T WANT THAT. SO, YOU KNOW SORT OF HAS TO BE ME EVEN THOUGH I FEEL I'M HELL OF A NICE GUY AND I FEEL THEY WOULD GET TO LIKE ME.

FABER: ALL RIGHT. ON THE, SUBJECT OF CORPORATE GOVERNANCE WE HAVE ABOUT A MINUTE LEFT. YOU AND I HAVE HAD MANY CONVERSATIONS ABOUT IT, YEARS AGO, I'M HEARING YOU SAY MANY OF THE SAME THINGS. YOU DON'T REALLY BELIEVE THINGS HAVE CHANGED AT ALL OR IMPROVED ALL OVER LAST LET'S SAY FIVE YEARS?

ICAHN: DAVID, IT'S ONE OF THE THINGS I WANT TO REALLY TALK ABOUT FOR A MINUTE. I THINK THIS IS A WATERSHED EVENT FOR CORPORATE AMERICA AND CORPORATE GOVERNANCE. I THINK THERE IS NO SUCH THING CORPORATE DEMOCRACY. WHAT YOU HAVE TOO MANY BIG COMPANIES ARE SORT OF FRATERNITIES. I'VE SEEN IT SO MANY TIMES. THEY'RE SO MANY COMPANIES IT JUST BADLY RUN. I MEAN THE FACT I CAN GO INTO THE MEDIMMUNES, TIME WARNERS, AND, FAIR MONTH, JUST TO NAME A FEW, KERR-McGEE, MAKE MONEY FOR ALL SHAREHOLDERS, WE MADE OVER $50 BILLION FOR SHAREHOLDERS SINCE I STARTED THE HEDGE FUND. REASON YOU CAN DO IT --

From Icahn's remarks in both interviews, we see that he has an overriding concern with lax and ineffective American corporate management and its putative overseers, their boards. From Faber's interview, which occurred Friday, and to which the Journal writers could have had access, we know that Icahn had already dismissed the funding/cash dividend aspect of Motorola's situation, turning instead to a management so out of touch with its own financials as to suffer a financial disaster in one quarter, and be surprised by it. I heard one CNBC on-air guest today, in defense of Icahn, describe Motorola has having blown 'several' recent quarters.

For some perspective, I've pasted three price charts for Motorola vs. the S&P500 for the past two, five, and thirty years. In the two-year view on the left (please click on charts to see a larger version), it's clear that the company's performance has been anemic for at least two full years, sliding steadily since last September, and having more or less stalled prior to that, after a brief upturn in early 2005.

So, in rereading the Wall Street Journal piece, I find that it is mostly way off base. The authors offer no comprehensive track record of Icahn's investment performances via his public battles at firms such as Kerr-McGee, Blockbuster, Time-Warner, and Motorola. Icahn himself alleges that they've earned $50B for 'shareholders,' presumably all those present when he bought into those corporate situations, since he began his hedge fund. Again, from a CNBC source, charted on-air today, it looked as if Icahn's record is overwhelmingly positive amidst his several corporate crusades of the past few years.

Second, the Journal writers mistakenly attribute Icahn's focus and value to just arguing over Motorola's cash hoard. In fact, Icahn is concerned by the lack of effective management and, further, the even more out-of-touch board. It's no surprise, given Icahn's invective for boards in general, that the entire Motorola board came out against him joining them.

Looking at the five-year price chart above, Icahn's attitude is well based. The firm's longer term performance is decidedly erratic and anemic. It features a drop off a cliff in 2002, followed by the Razr-led recovery. Since then, it's stalled.

In the Faber interview, Icahn notes that he has left several boards, because his work there was complete. Further, he explained, in the cited passage, that he didn't need to join the board of Time-Warner to have impact. Overall, given Icahn's effect on the value of the corporate situations to which he has turned his attention, I would venture to believe that most intelligent shareholders would and should welcome his board membership at their underperforming companies. The Journal article writers seem to miss Icahn's sort of 'global' effect on company boards and managements. Not every time, but most times, and for significant total return impact.


To me, Icahn's most persuasive arguments for a Motorola board seat are two-fold. First, he's a large shareholder. I don't know the exact percentage, but evidently he feels he is proportionately significant enough to merit the seat. Second, he's documented recent management ineptitude, compounded by board member complacency and complementary ineptitude. At this point, simply shouting "what's going on here? does anybody know why this place is out of control and underperforming," would apparently be a breath of fresh air for shareholders. The board seems to have abdicated its responsibility to that group.

Lastly, the thirty-year price chart, above, tells a stunningly unusual story about this technology firm. When you post this type of long-term chart for most tech firms, they more or less handsomely outperform the index over such a long timeframe. While nobody has this kind of foresight, the ultimate 'buy and hold' would have generally served most investors well for companies like Dell and Microsoft, recent travails notwithstanding. Motorola is different. For all its erratic performances of the last fifteen years, investors would have not been rewarded for this risk, relative to simply holding the S&P500. Over fifteen or thirty years, Motorola has failed to outperform the market, even though it tends to engage in rather higher-risk, allegedly higher-growth businesses. That's a shocking legacy that ought to give shareholders pause before they vote against adding Carl Icahn to their board.