Motorola Showdown: Icahn vs. Zander

The corporate raider has been waging a war of words with the Motorola CEO ahead of the cell-phone maker's May 7 annual meeting

Forget De La Hoya vs. Mayweather. The biggest slugfest these days is Zander vs. Icahn. In one corner there's Ed Zander, CEO of Motorola (MOT), the once-soaring, now reeling cell-phone maker. In the other is Carl Icahn, the corporate raider turned shareholder activist, who has been agitating for change at Motorola and wants a seat on its board of directors (see, 4/1/07, "Motorola: Cut Icahn’s Interference"). Like antsy pugilists trying to work the media for a pre-fight edge, the two have been waging a war of words leading up to their showdown May 7 under the lights at Motorola's annual shareholder meeting in Chicago.

A couple of months ago, it looked as if Icahn didn't stand a chance. He came onto the scene in January amid the early fallout from Motorola's pursuit of market share at the expense of profitability. Icahn snapped up a barrelful of shares and called on the board to buy back up to $15 billion in stock. He had done much the same at several companies before, and Motorola shareholders dismissed him as an opportunist looking to pad his pockets rather than facilitate long-term change. "It's been said before that the only way to make Icahn go away is to make him money," says Shawn Campbell, principal at Campbell Asset Management, which owns Motorola shares.

But like any determined fighter, Icahn made adjustments during the battle. He's no longer suggesting that Motorola devote all its cash to buybacks—a move that would hurt Zander's ability to invest in the kind of innovation the company so desperately requires (see, 3/29/07, "Why Icahn May Hurt Motorola"). In recent days, Icahn has suggested that as a board member he can help Motorola address some of its operational deficiencies and sharpen execution. That posture, along with a greater understanding of the depth of Motorola's problems, has led to a new reality: It's not so farfetched to think that Icahn could indeed win a seat on Motorola's board. Zander and the other directors "just don't want Icahn around to muddy up the waters," says Tom McIntyre, president of McIntyre Freedman Flynn Investment Advisers, which owns about 200,000 Motorola shares. "I don't find that attitude acceptable."

Proxy Battle Possible

McIntyre is not alone. A big-time shareholder, ClearBridge Advisors, said May 4 it would support Icahn's board-seat bid. The asset management firm, owned by Legg Mason (LM), owns about 54 million Motorola shares, representing about 2.2% of the company. Neither ClearBridge nor Icahn could be reached for comment, but other shareholders say Icahn could have been successful in convincing Motorola's biggest shareholders to vote in his favor. The stock has climbed 4.3% since the end of April, and that's not due to a sense that the status quo will be preserved, McIntyre says: "Someone is making a bet that Icahn will be on the board."

What brand of director would Motorola get if Icahn prevails? Armed with a war chest approaching $6 billion, he has filed proxies to elect board members at forest-products company Temple-Inland (TIN) and homebuilder WCI Communities (WCI). He bought a $89 million stake in biotech company MedImmune (MEDI) and contemplated a proxy battle before the company agreed to be sold to British drug maker AstraZeneca (AZN). At the same time, Icahn's 86.5%-owned holding company, American Real Estate Partners (ACP), is finalizing a $5.3 billion takeover of auto-parts maker Lear (LEA ).

Icahn's model for Motorola might be Kerr-McGee, the Oklahoma-based oil and gas company caught in Icahn's crosshairs in early 2005. Icahn bought in at $71.60 a share and launched a proxy fight that forced management to spend $4 billion to buy back 29% of its stock at $85 a share. Icahn made about $370 million when the company was put up for sale a year later.

Bickering by Letter

For their part, Zander and his board feel as though they've sufficiently acquiesced to Icahn's wishes. Since Icahn's campaign started, Zander has announced a $2 billion buyback and committed an additional $3 billion to future repurchases. He's realigned the company's management, naming Greg Brown as chief operating officer and appointing new heads of the struggling mobile-phone unit. An uphill climb remains, and profitability won't return until yearend. But Zander is committed to a turnaround. "We need to get our oxygen and then we can move to the next level," he told BusinessWeek after the company released first-quarter earnings in April.

Zander just wants no part of Icahn's help from the inside. In a May 1 letter to shareholders, the Motorola board vehemently discouraged investors from voting for Icahn, saying he is unfamiliar with the company, industry, and markets. "Carl Icahn offers no plan to deliver value to all Motorola stockholders or to improve the performance of our Mobile Devices business." In a subsequent letter, the company said Icahn sits on too many boards to be effective in shaping management at Motorola.

In a war of words some investors found off-putting, Icahn called Motorola management "terrible," and noted that he has extensive experience generating shareholder return while serving on multiple boards. "To see the letters going back and forth is more like high school kids arguing," McIntyre says. "It's really embarrassing."

"Give Zander More Time"

Some shareholders say Zander should avoid squaring off with Icahn and heed the approach of executives like Time Warner (TWX) CEO Richard Parsons. When Icahn was agitating at Time Warner, Parsons walked to Icahn's office to sit down with him, and then sounded out investors who liked Icahn's plan to hike the 2006 stock buyback. Icahn says the two are friendly and that Time Warner "is a great company."

Of course, there are many shareholders who agree with Zander and don't think it's a good idea for Icahn to sit on the board. "Even if he had a top board seat, he would not be involved in the day-to-day [management]," says Dan Genter, president and CEO of RNC Genter Capital, which owns roughly 200,000 Motorola shares. Bringing in someone like Icahn essentially means voting Zander out, he says. And most shareholders have not arrived at that point. "It's not an easy turnaround," Genter says. "I would give Zander more time."

Many believe that the board is giving Zander until yearend to show he can get Motorola back on track. But he'll have his hands full at the shareholder meeting, when Icahn could be present to do battle. Icahn "will have an audience to make his case," says Todd Lowenstein, portfolio manager at Highmark Capital Management, which is considering buying Motorola stock. "All that can happen is he'll garner more support and management will lose support."

Whichever side emerges victorious, it's sure to be the fight of the year.

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