The problem boils down to this: on the one hand, Motorola has problems that are not going to be easy to fix. And on the other hand, one board seat and a 1.39% stake won’t give Icahn enough leverage to get much done.
Still, the news has the Street once again thinking about the real value of Motorola. Merrill Lynch’s Tal Liani theorizes that by changing the capital structure of Motorola to look more like a typical S&P 500 company and levering up, you could boost the value of the stock to about $26; he figures the company could raise $4.2 billion in debt and use it along with some of the existing cash to buy back shares. Alternatively, on a sum-of-the-parts basis, he sees the value of the company at $23 a share, or about $4 above the current level.
Not even Liani is advising investing in the stock on that basis, though; he has a Hold rating on the stock. And many others on the Street remain skeptical. Here’s a quick rundown on some of the Street’s other reactions to the Icahn news.
Jeff Kvaal, Lehman: Should Carl Ican achieve a board seat, we believe changes to MOT’s plan would be modest give the size of the board [there are 13 board members] and our view that MOT’s 2007 plan has investor support…Icahn has suggested adding debt - challenging conventional wisdom in telecom equipment - but has not yet suggested operational or strategic changes. Given the board’s size, diversity and prior willingness to act, we believe his impact would be modest. Daryl Armstrong, Citigroup: While the introduction of a change agent like Icahn provides the potential for changes in capital allocation/business portfolio, we think any external agent will have little impact in addressing the operational issues plaguing handsets…We would not expect that the investor momentum behind an external change agent will be strong enough to enforce major new changes until the success of failure of the new SCPL platform is more clear. Casey Ryan, Nollenberger Capital: Our advice to investors is to ignore the speculation and circus-like atmosphere that is generated by Icahn’s activities and to focus on important developments in Motorola’s core handset business. The company must improve product mix by making gains in high-end phones while improving gross margins in low to mid-tier handsets on a per-unit basis. Absent improvements in the handset business we expect to see continued weakness in gross margins and the company’s overall results.
Motorola today is down 5 cents at $19.53; yesterday the stock gained $1.27 on the Icahn news.