March 12 (Bloomberg) -- Billionaire shareholder activist Carl Icahn increased his stake in Motorola Inc. and started a proxy fight for a board seat after demanding the mobile-phone maker return more of its cash to investors.

Icahn, who now owns 2.5 percent of the stock, submitted proxy materials for the Schaumburg, Illinois-based company's May 7 shareholder meeting in a regulatory filing today. Motorola is reviewing the statement, spokesman Paul Alfieri said.

The pressure may force Motorola to concede to Icahn's demand that the company use all of its $11.3 billion in cash to repurchase shares. Motorola, the world's second-largest mobile- phone maker, may aim to keep funds to invest in new products and bolster profit margins. The company said this month that it won't endorse Icahn's nomination.

``He's done this before successfully,'' said Kenneth Leon, an equity analyst at Standard & Poor's in New York. He rates the shares ``buy'' and doesn't own any. Icahn's influence ``may improve Motorola's decisions in terms of shareholder value.''

Icahn was unavailable to comment, said his assistant, Susan Gordon. Motorola said in January that Icahn, 71, demanded a seat on its board after profit dropped 20 percent in 2006.

The founder of Icahn Partners LP said last month he plans to buy about $2 billion of Motorola stock. He said today he owns 59.4 million Motorola shares, which would make him the eighth- largest shareholder, according to data compiled by Bloomberg.

Shares of Motorola gained 7 cents to $18.54 at 4:01 p.m. in New York Stock Exchange composite trading. They have fallen 11 percent in the past 12 months.

Four-Year Low

Motorola Chief Executive Officer Ed Zander, a 60-year-old former Sun Microsystems Inc. executive who joined the company in 2004, is working to boost profit margins on phones from an almost four-year low and to win sales from market leader Nokia Oyj.

Shareholders voting for Icahn need to mark, sign and return a gold-colored proxy card. Those supporting Motorola's proposals will use a white card. Icahn said he had hired Innisfree M&A Inc. as his proxy solicitor. D.F. King & Co. is assisting Motorola.

``Mr. Icahn urges stockholders to vote for him,'' Icahn and his affiliate companies said in the filing. ``We urge you not to sign any proxy card sent to you by Motorola.''

Icahn built his reputation in the 1980s as a corporate raider, targeting big companies including Phillips Petroleum Co., Texaco Inc. and Trans World Airlines Inc. More recently, he failed to force a breakup of New York-based Time Warner Inc., the world's largest media company.

Chief Financial Officer David Devonshire said last month Motorola will stress improving profitability after the departure of the head of its mobile-phone unit, Ron Garriques, who focused on winning market share. The company is cutting 3,500 jobs.

Motorola is looking at ways to reward shareholders while keeping funds to support its growth, Devonshire said last month. ``We're looking at what we can do,'' without giving up options, Devonshire said at a Bank of America conference.

To contact the reporter on this story: Ville Heiskanen in New York at vheiskanen@bloomberg.net

Last Updated: March 12, 2007 16:10 EDT