Wednesday, November 21, 2007

The Path Back for Moto

It's been a rough-go for Motorola in the last few weeks. After its last quarterly call in which it guided higher for the Fourth Quarter, the market has treated it harsher than the general market during the month of November. The stock has slipped. Some critics are suggesting it be dumped outright -- frustrated because of a lack of change in management. We don't think so - yet. This is a company which can still save itself -- although there's no quick fix here.

Our group has been pushing Motorola's board and management for changes since July. Earlier this month, we had the opportunity to speak for over an hour with Motorola's head of IR, Dean Lindroth. Mr. Lindroth and the Management team deserve credit for listening and engaging in dialogue with a group of investors (133 individuals owning 600,000 MOT shares) who are frustrated and want to share ideas for turning around this great company.

We certainly didn't agree on each point that we presented, but they deserve respect for listening. We intend to continue to speak out in a positive and constructive fashion on ideas for how this company can better unlock value.

Here is a summary of the views we shared with Motorola:

We believe, as I’m sure management and the board do, that Motorola belongs back in its industry leadership position.

Here are our suggestions on “opportunity areas” that – if you were to implement – we believe would be received warmly by the Street and by existing Motorola shareholders and employees.

1. Improving the Culture. Any time you do RIFs, there’s obviously going to be a blow to internal morale and fingers pointed at management. From the comments I’ve heard from Ed, Tom, and Greg on this, I think your opinion is that this will work itself out as the company’s financial results improve. While I agree this will help, there’s an opportunity here to further bolster the morale: Bob Galvin. I have been impressed with how highly Bob is still regarded by Motorola employees. There is still a deep appreciation for the values he instilled in the company. Although whenever a new leader comes in, there is a need for change, there is an enormous opportunity to remind people that the best aspects of Motorola’s old culture still exist. I am not saying Ed and the team need to recapture the Motorola of old. There were some parts of that (some would say) more paternalistic culture that don’t necessarily fit in today’s marketplace. However, there were some amazing and unique aspects of the old culture which employees should be reminded about. If Ed were to meet with Bob and perhaps invite Bob to an internal “town hall” type of meeting, I think there would be a great boost to the morale. This wouldn’t diminish Ed’s status as the leader, but strengthen it.

2. Further Clarify Strategy (Business, Corporate, Software, Acquisitions). “Seamless Mobility” is a catchy phrase. I think I understand what Motorola means by it and how it results in your core three businesses, etc. However, I’m not sure and I don’t think I’m alone here. It would be helpful for me – as a shareholder – and, I believe, to other analysts, institutional investors, and employees, if Ed could more clearly spell out what Motorola is building towards in the coming 3 – 5 years. How are you going to be unique compared to Nokia, Samsung, the iPhone, and Google? How do the three businesses all fit together? What are the criteria you use for new acquisitions? How will you win in software (see point below)? You don’t want to share your most intimate of strategic details with your competitors, but – in my opinion – you’ve been too private. By not speaking up more, there is a perception created that there is not a clear strategy being followed. That was ok when things were going well with RAZR, but you can’t skate by without more explanation these days. Another way of putting this is that you could win over so many more supporters with just more explanation as to where things are heading. Tom has done a great job of this within his area. He’s provided some clear metrics to measure his effectiveness on in 1 – 2 years from now. The Street loves this. We need the equivalent of this from the strategic perspective.

3. Winning in Software/Services. I think the most important hire you’ve made in the last 6 months is not Stu Reed to lead MDB but Alain Mutricy to head up software. Many of your competitors (most notably Nokia) have staked out software/services as a key area for battle in the next 5 years. Now Apple and Google are raising the stakes further. Motorola has always known the importance of software; hence the Good acquisition. However, there is still much work to do here. Streamlining onto fewer platforms and getting Linux/Java out the door is necessary but not sufficient for beating your rivals. The bar has really been raised by the companies mentioned above (even though I know Google is technically a MOT partner, just as Windows Mobile is a partner). We need a much stronger story to tell about what’s unique and exciting from a user-perspective about Motorola’s software. Otherwise, you’re a hardware vendor. Ed knows better than anyone that that’s not a market space you want to be relegated to. You need to say more than “stay tuned” on this issue. The Street wants to know how we’ll be different.

4. Further Strengthening the Board. I know Motorola and its directors take corporate governance issues very seriously. You have some very strong individuals on the board. However, we believe that – after a certain period of time on the board – one’s independence diminishes through no fault of a director’s own. Right now, the board at Countrywide is under-fire on this issue of director tenure length.[1] A decade is a fair length of time for any non-executive director serving on any company. We appreciate the years of service provided by Judy, Lewent, Nicolas Negroponte, Samuel Scott III, and Dr. John White, but we believe there is an opportunity to bring in some fresh eyes – as you have done recently with Anthony Vinciquerra of Fox and David Dorman. We think doing so would strengthen your standing on Wall Street (assuming you pick the right people). As with the point on Culture above, there’s an opportunity here for the Company to turn a perceived weakness into a strength. Instituting a required stock purchase amount by directors would also be appreciated by the Street and – according to research I’ve done – also result in even more meaningful participation by all Motorola directors.


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