When Motorola CEO Greg Brown agreed on Apr. 7 to back two of Carl Icahn's nominations to the company's board of directors, it was an admission of defeat. Icahn, the activist shareholder who has been calling for changes at Motorola (MOT) and demanding board representation for a year, had substantially beefed up his stake in the cell-phone and network-equipment maker in recent months, likely rendering further efforts to block his nominations moot.
Since Icahn first demanded a board seat a year ago, his voting power has more than doubled to 6.4%, according to Securities & Exchange filings as of late March. While that alone wouldn't be enough to elect his representatives, Icahn is believed to have built considerable support among other agitators. "Other pushers for change have started to move into the shares," says Ronald Orol, author of Extreme Value Hedging: How Activist Managers Are Taking On the World (Wiley, 2007).
Icahn might have gained some board seats—perhaps as many as four—at the annual meeting in May, says Orol.
Icahn's Men on the Inside
So Motorola cut to the chase, adding two Icahn representatives to its own slate: William Hambrecht, CEO of WR Hambrecht + Co., and Keith Meister, a managing director of Icahn's investment funds and principal executive officer of Icahn Enterprises.
The latter nomination, effective immediately, is a huge win for Icahn. When Icahn first tried to get Meister on the slate for last year's nominations, Motorola rejected the idea, telling investors that Institutional Shareholder Services, the proxy advisory firm, had once "questioned Meister's limited financial background." As recently as March, Motorola again refused to endorse Meister's nomination, prompting a sarcastic quip by Icahn about the company's plunging market value in his own letter to Motorola's shareholders: "What does one have to do to qualify—lose $37 billion dollars?"
The capitulation came less than two weeks after the ailing gearmaker had already caved in to Icahn's biggest demand: On Mar. 26, Motorola announced plans to split its business into two parts by spinning off its iconic but ailing mobile-phone business.
Investors applauded Icahn's victory, boosting Motorola's stock by 1.76%, to 9.84 a share. Yet in accepting defeat, Motorola has managed to dilute the leverage Icahn's representatives can wield. One of the two slots going to Icahn's representatives will be vacated by former CEO Ed Zander. But the other will be created by expanding the board's size from 13 to 14 rather than replacing another one of the existing directors. And as part of the deal, Icahn withdrew his lawsuits against the company.
What will Icahn's victory mean for Motorola's future? For starters, with fewer distractions from lawsuits and proxy battles for board seats, management will be able to concentrate on righting the troubled business. "They are going to keep on the path they are on right now," says Eric Jackson, a money manager who represents "Motorola Plan B," a group of 135 individual investors, mostly former and current Motorola employees, who collectively hold 600,000 shares.
What Icahn's representatives will do now is see that company's breakup to completion. By gaining board seats, "Icahn just wants some assurance that they are going to go through with [the separation]," Orol says. When the plan was announced, Motorola hedged its words, stating that "there can be no assurance that any separation transaction will ultimately occur or, if one does occur, its terms or timing." So far, says Standard & Poor's analyst Todd Rosenbluth, "all we've heard is the [plan for a] spin-out." With no information about who will lead the phone business, what the terms of the spin-off will be, or when it might happen, "there are better alternatives" for investors, Rosenbluth says.
While global cell-phone sales are expected to increase 9% this year, Motorola's handset sales are forecast to fall by 3%, according to S&P. The company is expected to break even this year after losing $49 million in 2007.
Icahn might also push to accelerate the reported negotiations with rival equipment maker Nortel Networks (NT) to acquire or to create a joint venture with Motorola's cellular infrastructure business, says Mark McKechnie, an analyst with American Technology Research. "I've got to imagine Carl Icahn has got more up his sleeve than agreeing to a status quo and the current plan," he says.