Icahn's Board Bid Rings Motorola Shares

In documents filed with the Securities and Exchange Commission on Tuesday, Motorola said the swaggering activist shareholder is planning to seek nomination to the board of directors at the Schaumburg, Ill., company's next annual meeting, which hasn't been scheduled yet. "The notice contained no additional information regarding his intentions," according to a statement on Motorola's web site.

Icahn owns 1.39% of Motorola's outstanding shares, about $600 million worth, placing him just below major investment firms such as Jennison Associates, Legg Mason and Dodge & Cox.

In a Tuesday afternoon interview, Icahn told the financial news cable channel CNBC he sought to take aim at Motorola's hefty $12 billion cash balance.

"If they want to be money managers, they can go to Wall Street," he was quoted as saying. "Why sit on $12 billion earning 3%?"

Wall Street analysts said they were still waiting for details on Icahn's strong-arm overture, but did have a few thoughts on its consequences.

"Mr. Icahn seeking a seat on Motorola's board is likely to be viewed as the first step in a process of restructuring the company, including possibly a recapitalization or a breaking up of the company," Kaufman Brothers Equity Research analyst Raimundo Archibold wrote Tuesday. "While our Buy rating on the shares is based on company fundamentals, corporate actions such as these are apt to be well received by investors."

Icahn's previous activist forays included a successful 2004 attempt to thwart Mylan Laboratories' (MYL) acquisition of King Pharmaceuticals (KG). He also accumulated a large stakes in Time Warner (TWX) with the aim of breaking up the company. That gambit failed last February.

"It's headline-generating news currently — any time you attach Icahn's name to a stock it's going to have an initial pop," says Bill Choi, an analyst at Jefferies & Co. "But in this case there's no initial information, so we don't know what kind of effect it's going to have."

Prior to Icahn's interview, he said recapitalization might well be a possible goal of his bid for a board seat.

"Motorola is underleveraged, but the whole industry is underleveraged and has net cash," Choi says. "Motorola's considering the right things with its cash balance, which are buying back shares or using it for acquisitions."

Despite a $4 billion, 14-month buyback completed over the summer and plans for a further $4.5 billion repurchase, Motorola stock could use any help it can get. Shares hit a 52-week low of $17.90 on Jan. 12, and the stock has dropped 19% over the past year.

Archibold splits the company into three main businesses and calculates the aggregate values at $35 to $40 a share. Using comparable company revenues, he wrote that the mobile devices, networks and enterprise and connected home units have potential value and could rival Nokia (NOK), Ericsson (ERIC) and Arris Group (ARRS) in each respective segment, "as Motorola executes its strategy to improve margins and returns."

He said he expects the company to gradually improve margins in its handset business and benefit from a continuation of positive trends in the other two businesses.

That doesn't leave much room for an Icahn-style fix, says Choi. Motorola's other big news — a boost in its relationship with Texas Instruments (TXN) to supply its 3G, WiMax and OMAP businesses — is the kind of incremental, operational move that will get the company back on track under Chief Executive Edward Zander.

"Where can Icahn add value? Unlike other Icahn targets, Motorola's management team is really pretty good," Choi says. "They're doing all the right things."

The handset business lacks a successor to the knockout success of the Razr mobile phone, and that's a problem.

"This year there's no real hot product to speak of, and that's something to fix, but it's not something Icahn can fix," he says.

Motorola's connected home business — the cable set-top boxes unit — has moved into double-digit operating margins and continues to improve. Its network business is an $11.2 billion source of annual revenue and also produces double-digit operating margins, he says.

Though its fourth-quarter earnings, released Jan. 19, did a number on the stock, sinking shares 5% through Monday's close, Choi says management had the right response.

"They had a very difficult quarter, but the management team comes out and accepts responsibility, starts reducing headcount and starts talking about how to fix things," he says.

However, CFO David Devonshire did tell analysts and investors on the earnings call that the company was disinclined to take on more than its current $4 billion in debt.

While First Global analyst Mahu Babu wrote in a Monday note that Motorola's low-end handset business — where it's showing the biggest growth — has "wafer-thin margins," others see a piece-by-piece rehabilitation.

That's not the sort of thing that gets boosted with the arrival of a high-profile corporate slasher like Icahn, but it's really too early to tell what's going on beyond the headlines.

"So far you're fighting a ghost," Jefferies & Co.'s Choi says. "You don't know what Icahn is trying to do or how he thinks he's going to add value."