Zander's Exit Leaves Icahn Free To Pull The Strings (MOT)

By Glenn Curtis | November 29, 2007 AAA

Beginning in the new year, Motorola's (NYSE:MOT) chief executive Ed Zander is out, and company president and chief operating officer Greg Brown is in.

This news barely registered in the investment community when it was announced on November 30 - probably thanks to its release on a lazy Friday during the holiday season. However, the fresh perspective and the possibility of Carl Icahn gaining influence should both be viewed as big positives for the common shareholder.

Zander Deserves Some Credit
I don't think that Zander was a bad chief executive, and I'm not cheering his departure. The wildly popular Razr cell phone was released during his reign. Two years ago he also had many people thinking Motorola could challenge Nokia (NYSE:NOK) for the title of top selling cell phone maker.

During much of his tenure, and particularly during the Razr's introduction, the company's stock was riding high.

That said, it's important to realize that Zander's tenure wasn't all peaches and cream. After the Razr, the company struggled for hits, and suddenly it was seeing increased competition from the likes of Samsung. As the Razr dropped in popularity, Motorola's financial results started to suffer in earnest. (For more on the value of leadership, see Putting Management Under The Microscope.)

A New Era
Brown's been with the company since 2003. He's also earned a solid reputation for himself presiding over the company's acquisition of Symbol Technologies. According to a recent BusinessWeek article penned by Roger Crockett he is also held in high regard by the exiting Zander.

With Zander out of the equation, will the good times return once again? A fresh perspective at the helm might only be one of the benefits of Zander leaving. In my mind the other big benefit is that it seems to empower shareholder activist Carl Icahn, who owns 2.7% of the outstanding stock. (For related reading, check out Activist Hedge Funds.)

Icahn apparently wanted Zander out for some time. It's also been reported that he would like to see the company split into several businesses. Icahn won't necessarily get his way with Zander gone. After all, he faced a tremendous amount of opposition earlier this year when he tried, and failed, to obtain seats on Motorola's board. However, with his primary opposition out of the way, and the apparent realization by the board that the company is going to have to do something dramatic in order to gain ground on the competition, I think that Icahn has the potential to be victorious.

In short, Icahn's involvement and the possibility that value enhancing propositions could be just around the corner should be viewed as a tremendous positive for investors.

More to Moto than Breakup Value
I wouldn't invest in this company purely on the hope that a corporate transaction might occur, or on the potential actions of one activist shareholder. That said, the Zander departure could open up a lot of doors and certainly piques my interest. Other things that are intriguing to me about the company include:

1) I don't think that anyone is expecting a rapid turnaround. This could amplify any positive news the company might report.
2) I suspect management will look to lump as many costs associated with previously announced job cuts into 2007. This could make 2008 results look much better by comparison.
3) The company remains one of the preeminent players in cell phones, and it has a decent product portfolio, yet its stock is trading near multi-year lows.
4) At present Motorola trades at less than 3-times reported book value. This doesn't do justice to its future earnings potential.

The Risks
When a new chief executive takes the helm, the next move is often to clean the decks of any deadwood - meaning unneeded employees. If Brown cleans house, it could hurt the first couple of quarters in 2008. Another concern is that Nokia and Samsung aren't sitting still. These players have lots of money and they continue to build out their pipelines and to advertise their wares. Thus gaining market share back is unlikely to happen overnight.

And finally, although I think that Icahn has the potential to make a difference and to have some influence over corporate governance issues, there is no guarantee that he will attempt to do so or that he would be successful. It's also important to note that the company could spend a great deal of time and money fighting him. This could actually be a negative for the stock.

Bottom Line
Ed Zander is out at Motorola. Frankly, I think this is a good thing for the company overall. Not only does it mean that Greg Brown, who is widely believed to be a competent manager, will take the helm, it also could clear the way for Carl Icahn to exert influence on the board.

A turnaround in not guaranteed and could take a long time to materialize, but the CEO shuffle combined with Motorola's low stock price and enviable position within the industry make the stock intriguing to me.

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