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Icahn Bid Adds To Woes Dogging Motorola's CEO The Wall Street Journal - Li Yuan and Christopher Rhoads Motorola Inc. Chief Executive Ed Zander is facing another battle as he tries to put the stumbling cellphone maker back on track, with news that activist investor Carl Icahn has acquired at least a 1.39% stake in the company and is seeking a seat on its board. Mr. Icahn's move comes as Motorola deals with falling profits -- and a share price that has dropped 30% since mid-October -- amid a collapse in profit margins for its popular RAZR cellphone, which is struggling with intense competition and pricing pressure. Earlier this month, Motorola, which makes one in four of the world's cellphones, reported a 48% decline in net income in the fourth quarter, which Mr. Zander called "unacceptable." The Schaumburg, Ill., company also has ceded buzz in the industry to Apple Inc., its partner in a previous phone project, which this month introduced its highly anticipated iPhone. Many industry experts are deeply critical of Mr. Zander's performance -- and his at times awkward attempts to explain the recent problems to investors. The turn of events contrasts with the performance of rivals such as Nokia Corp. -- the world's largest cellphone maker by market share -- and Telefon AB L.M. Ericsson and Sony Corp.'s Sony Ericsson joint venture, which each reported strong earnings recently. It also raises the question of whether Motorola, which had appeared to right itself the past two years after several years of stagnation, is facing just a bump in its turnaround or a more profound problem. The appearance of Mr. Icahn on the scene could add to that uncertainty. Known for aggressive tactics in pursuit of higher shareholder returns at vulnerable companies, Mr. Icahn has pushed for deep changes at companies ranging from media conglomerate Time Warner Inc. to a South Korean tobacco company. He wants Motorola, he said in an interview, to spend all of its $11.2 billion of cash to repurchase its shares, which are priced "unrealistically low." Yesterday, the stock rose 6.9% on the revelation of Mr. Icahn's holding and intentions, to close at $19.58 on the New York Stock Exchange. It remains unclear, though, whether the investment will be enough for Mr. Icahn to have his way at Motorola. His holding ranks him as its 13th-largest shareholder; those listed ahead of him are institutional investors. He will be vying for one of the 13 seats on the board at its annual spring shareholder meeting -- a bid Mr. Zander can try to block. "There are two stories at Motorola right now," said David Eiswert of T. Rowe Price Associates, which as of September held 12.8 million Motorola shares. "One is the more subtle story that it is becoming a better company. The second is the one that's in your face -- that they made a big blunder in the fourth quarter." The question for investors, he said, is whether they trust management to use Motorola's pile of cash to continue to build the company, or whether they prefer to have it in their pockets. "I am not so sure this is a broken company that needs someone to tear it apart and fix it," said Mr. Eiswert, who added that his firm hasn't yet taken a position on Mr. Icahn's plans. Motorola has consistently indicated it isn't interested in changing its current share-buyback plans. It has set aside $8.5 billion to repurchase shares, and used $4.7 billion of that to buy back shares since May 2005. "If they want to be money managers they should get a job on Wall Street," Mr. Icahn said, referring to the company's large pile of cash. Motorola said in its recent conference call to discuss fourth- quarter results that it has no plans to adjust its debt level, a remark Mr. Icahn said infuriated him. Mr. Icahn, who said he has had a few brief conversations with Mr. Zander in recent days, said he isn't looking to replace Mr. Zander. Unlike his proxy fight to gain board seats at Time Warner last year, Mr. Icahn didn't raise the issue of excessive spending. But he added that his team plans to study Motorola's expenditure structure. He is advocating a "Dutch tender" be used for the buyback, which would mean Motorola would offer to buy a set number of shares in a certain price range. Motorola declined to comment on specifics of Mr. Icahn's demands, but said it is reviewing his bid for a board seat. The company has said it aims to use some of its cash for acquisitions. Mr. Zander, the former No. 2 at software company Sun Microsystems Inc., became the iconic cellphone maker's first outside CEO in its 79- year history when he took over in January 2004. His first two years at the helm were punctuated by the huge success of the ultraslim RAZR, introduced toward the end of 2004. Motorola has sold more than 75 million units, making it the most popular cellphone in history. Until the latest developments, Mr. Zander had chalked up a string of profitable quarters as Motorola gained market share on Nokia. But the focus on market share has come at the expense of profitability. Mr. Zander has told analysts he expects Motorola to return to double-digit operating margins by the second half of 2007, but he also admitted that might be difficult. It's "like falling off a horse," he said. "Getting back on isn't easy." Indeed, Motorola has struggled to find a way to follow up the RAZR's success. It has unveiled other cellphones, including a competitor to the BlackBerry called the Q, but with mostly moderate success. Many of its subsequent phones have been variations of the RAZR, using the same platform but with different colors and features. That issue was brought home at a big industry conference this month in Las Vegas, where cellphone makers were overshadowed by the simultaneous unveiling of Apple's iPhone in San Francisco. At the Las Vegas event, Mr. Zander made light of Motorola's disappointing earnings and stock price by riding onto the stage on a bicycle, explaining that his accounting department told him it was the only way he could afford to travel to the conference. He then joked with the CEO of Good Technology -- one of several companies Motorola has acquired recently -- that he was joining at a favorable time, since his stock options were at Motorola's current low share price. Mr. Zander introduced some new wireless features for the RAZR and some home media-related products, according to people in attendance. The next day in San Francisco, Apple showed off its iPhone to much excitement. Motorola had joined two years ago with Apple to build a music phone, but the device suffered from a lack of storage space and clunkiness, among other things. "We have come to rely on Motorola for innovative design and product leadership," said William Markey, president of RCBG, a telecom- consulting firm in Chicago. "But to have Apple come out with a phone five years ahead of every other phone out there -- that has to kill you." It wouldn't be the first time Motorola has stumbled after launching a hit phone. In 1996, after introducing the world's first clamshell cellphone, Motorola dominated with more than 50% of the global market. Just two years later, Nokia zoomed past Motorola, as the company that pioneered much of the early cellphone technology declined steadily. Mr. Zander is credited with returning the company to profitability and bringing some much-needed marketing energy. But industry analysts say the RAZR's price fell too low. What's more, that made consumers reluctant to pay higher prices for top-end products from the RAZR line. For example, the KRZR (pronounced "crazer") costs $100 with the purchase of a two-year service contract, twice the RAZR's current price. To regain profitability, Motorola has to compete more effectively in emerging markets, where cellphone companies are witnessing tremendous growth. Motorola also has fallen short on higher-margin handsets for so- called third-generation networks many carriers are building to offer services such as video and advanced games. Motorola executives said AT&T Inc.'s Cingular Wireless unit, one of its largest customers, was left without these advanced units until this week. "We let that customer down," Ron Garriques, president of the company's mobile- device business, recently told analysts. Mr. Garriques said that after his wife gave birth in early January, Mr. Zander sent a card joking that, "This is the first rich- experience, next-generation device Ron delivered all year."
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