Motorola's Board Hears Icahn Loud and Clear

Carl Icahn’s not asking Motorola (MOT) if “they can hear him now.” Wednesday, the beleaguered company caved to shareholder pressure and announced they would agree to split the business into two separate companies. One will house the mobile devices (cell phone) business. The other will become home to their broadband and mobility solutions group.

In a press release, Motorola said the separation is expected to happen in 2009 and that it will be implemented as a tax-free shareholder distribution. A new CEO will be recruited to run the phone company.

Icahn, one of Motorola’s largest shareholders, and the leading voice for change, fired back a hostile letter to the board (see below) that asked them to clarify their intent. In three questions, he asked: why will it take so long to split, why did it take the threat of a lawsuit to make it happen, and whether or not, in fact, it will actually happen at all.

With the fight now grabbing headlines, it’s clear the rest of the company’s board is hearing him loud and clear.

In the fourth quarter, Motorola earned only a paltry $100m (4 cents a share). That was a dramatic decline from the $623m earned a year earlier. The cell phone business, which saw a year over year drop off of more than 30% in net sales to $18.9b in 2007, was largely responsible.

Separating the business groups, and giving the phone group its own singularly focused management team, will theoretically allow more attention to be paid to the product pipeline (which has stagnated and suffered a lack of creativity since the boom of the Razr in 2005).

That prospect, however, remains only “theory” because for now, too much information is as yet unsaid.

As Icahn says in his letter: “Time is of the essence and decisive action is required to reposition the Mobile Devices business for success as an independent company. [but] today’s announcement begs a few key questions.”

Two days ago Icahn sued Motorola to gain access to documents associated with the cell phone business. He is also fighting with them to get four seats on the company’s board. It’s the second proxy fight he’s had with the company in two years.

Investor Carl Icahn sent the following letter on Wednesday. It is reprinted from a copy attached to filings made with the SEC (they are available on their Edgar Database):

Ladies and Gentlemen:

Today’s - much delayed and long overdue - announcement regarding the spin-off of the Mobile Devices business and the establishment of two fully independent companies with separate management teams and Boards is clearly a step in the right direction. As you know, for some time I have argued that this should be done. However, as one of the largest Motorola stockholders, I continue to have concerns about the speed and manner in which a new management team is selected for the Mobile Devices business and the separation transaction is consummated. Time is of the essence and decisive action is required to reposition the Mobile Devices business for success as an independent company. Furthermore, today’s announcement begs a few key questions:

1. Why will it take you until sometime in 2009 to accomplish the separation?

2. Why does it take the threat of a proxy fight for you to make promises we all want to hear?

3. Do you intend to carry out your proposals or will it be a repeat of last year’s proxy fight strewn with a string of broken commitments? Obviously the tepid reaction of the market manifests shareholders’ views concerning the value of your commitment. The only statement made in your conference call we totally agree with is that … "there can be no assurances that any transaction will ultimately occur."

You stated during today’s conference call, "we discussed Board Nominees with Carl Icahn and we proposed two nominees and he declined." Again this is only partially true. It is true that Sandy Warner, head of the Nominating Committee called me and offered seats to two of my Nominees if I would drop the proxy fight. However, you failed to mention in your conference call that I told Mr. Warner that I would gladly accept this offer if the Board would also accept Keith Meister. Mr. Warner replied summarily to this offer that Meister did not "qualify." I asked Mr. Warner what does one have to do to qualify — lose $37 billion dollars? Mr. Warner then replied that the Board did not "know" Meister. My answer was that Meister would fly anywhere at any time to meet the Board so they could "know" him (I did mention that the situation at Motorola is too serious for the Board to remain a country club). My offer to Motorola stills stands.

You have stated to the press that our request for information about what steps the Board actually took to correct the problem at Motorola is an unnecessary distraction. We disagree. In a political election when constituents believe their representatives’ performance was inadequate, they are certainly not denied information as to whether their representative acted in a grossly negligent fashion. Why should it be different in Corporate America?

I do however agree with you that this proxy fight is a distraction that Motorola at this junction can ill afford. If as you have stated, we all want to benefit the stockholders of Motorola, then what possible reason is there for not putting Keith Meister on the Board. After all, how much can he eat at the Board meetings? On a positive side, having a highly intelligent, energetic individual like Keith, who has 145 million reasons to spend his time working toward the spin-off being accomplished, may well make this promise come true in a timely fashion.

We ask the Board meet with Meister, put egos aside and let’s get on with the urgent business at hand.

Sincerely,

Carl C. Icahn