Wednesday, April 30, 2008 Motorola Changes Not Enough

Cross-posted from this morning's

Motorola's (MOT - Cramer's Take - Stockpickr) fall from its perch atop the mobile-phone world has taken less than a year.

A year ago, the company successfully convinced its shareholders that they shouldn't elect Carl Icahn to the board, after the activist shareholder ran an unsuccessful proxy contest to shake things up at the company. Motorola management claimed that he was out of touch with the long-term interests of the company, as he had called on Motorola in early 2007 to initiate a massive stock-buyback plan and take on significant debt.

Management promised a turnaround was right around the corner for the 80-year-old company, with exciting new handsets beyond the Razr, and shareholders chose to believe them.

Today, Motorola's former CEO, Ed Zander, is on his way out after a string of missed quarters following last year's annual meeting. The company still has no stand-alone head of its mobile devices business (the current CEO, Greg Brown, is acting head). And the much-promised new handsets have been flops. Motorola now says the next batch of exciting new devices won't appear until well into 2009.

Instead of facing a proxy battle with Icahn again this year, Motorola recently folded its cards and agreed to appoint two of the investor's representatives to the board. The company also caved to Icahn's demand that the company split itself up in order to better recognize the value of the underlying businesses.

You might think these moves are enough to bring back the magic at Moto. They're not.
For the last 20 years, Motorola has perennially underperformed its potential. Back in the 1980s, Motorola was an American icon, a name arguably as big as General Electric's (GE - Cramer's Take - Stockpickr). Today, a comparison between the two is laughable. From 1992 through today, GE stock gains have outperformed Motorola roughly 450% vs. 50% (vs. 250% for the S&P 500).

History Repeating

What's also maddeningly frustrating for me as a shareholder is that Motorola already lived this current nightmare of its revenue dropping off a cliff 10 years ago. The company had a hot phone that grew so popular it took attention from developing other devices until -- after a great run -- the well ran dry and the company had to start from scratch. I'm not talking about the Razr -- but the StarTAC.

If you bought some Moto stock 10 years ago, you were getting in just as the StarTac was becoming the "must have" phone at the time. Attention-craving execs would lay it out on their lunch tables, eliciting compliments from others. Your Moto investment would have doubled in a couple of years.

Fashion designers know they have to change their lines every season, but Motorola's board and management team didn't. They failed to produce any popular successors, and Moto's shares lost 75% of their value from 2000 to 2003.

The board brought in Ed Zander in early 2004 to replace former CEO Chris Galvin. The ultra-slim Razr was just being released and it became the new StarTac. From the start of 2004 to October 2006, Moto's shares rose 60% -- triple the S&P's performance.

After three years of selling Razrs, with countless knock-offs, Motorola again hit the wall. Its stock is down 63% from 18 months ago. Despite its latest changes, Motorola needs to do much more.

Last July, worried that the company was going to sit back after beating back Icahn's bid for a board seat, I launched an activist campaign as an individual shareholder in Motorola. Using Web tools like blogging, YouTube videos, wikis and a "pledge your Moto shares" widget, I encouraged 130 other small investors to pledge a collective 600,000 Motorola shares (worth about $6 million today) in support of a "Plan B" of changes for the company to follow.

Unfortunately, the company failed to enact almost all of our "Plan B," except for replacing Zander.

When I launched my own activist hedge fund earlier this year, I deliberately bought no Motorola shares (although I still own some personally). Based on Motorola's inaction since I began my campaign, I couldn't look my own shareholders in the eye and justify an investment in the company.

However, I still feel a sense of loyalty to the many people who joined up with my campaign last year and want to see this company finally right itself. Many of the 130 people who "pledged" their shares with me last year were current or former Moto employees. Some of them have recently contacted me and asked my opinion on how they should vote their shares at the upcoming Motorola annual meeting on May 5. To them, I say: You have the power to finally improve this company by how you vote your shares.

A Bureaucratic Board

Motorola's board is highly dysfunctional. At 14 members, it's too large and bureaucratic. In my experience, when boards get larger than 10 members, they become more formal, there is less time for discussion and debate and the directors are more reluctant to speak up. It becomes less like a meeting of high-level advisers wanting to understand the growth of the business and protect the interests of shareholders and more like a slow day at the U.N. General Assembly.

Motorola has some very strong members (including its new Chairman David Dorman, who used to run AT&T (T - Cramer's Take - Stockpickr), and Tom Meredith, who has been acting CFO since last year and formerly Dell's (DELL - Cramer's Take - Stockpickr) CFO). And although the two new Icahn reps should help matters, this board needs an overhaul.

This group, charged with overseeing and monitoring the state of Motorola on behalf of shareholders, clearly shares the blame for what has happened. Yet, all the incumbent directors from last year (except Zander) are up for election again this year. That's simply wrong.

What's particularly puzzling is why Samuel Scott III, Judy Lewent, Nicholas Negroponte and Dr. John White are still on this board. I don't have anything against the backgrounds or experience of them, but each of these directors has been on the board for more than 10 years. That means they've had a front row seat to the two boom-and-bust cycles of the StarTac and the Razr. How could they let exactly the same problems occur twice under their watch?

Even in the best performing companies, no director (unless they're a founder or critical officer) should be on a board for a decade. Fresh eyes should be periodically cycled into the group to ensure it never becomes too clubby. For a company that's lost half its value in the last decade, it's unconscionable to have four directors with such a lengthy tenure. (Scott's actually been on the board for 15 years.)

Unless you're the owner or the owner's child, you don't get to drive out half the value in a company over 10 years and keep your job.

That's why all fellow Motorola shareholders should vote "withhold" for directors Lewent, Negroponte, Scott and John White. They should also vote "for" the three shareholder proposal on say-on-pay, recouping unearned management bonuses and new corporate standards at Motorola. In doing so, they'll embarrass the old guard into leaving.

Voting "against" directors does have an impact. I urged institutional and retail shareholders to vote against several of Yahoo!'s (YHOO - Cramer's Take - Stockpickr) directors last June (here's one of my YouTube political-style campaign ads). Thanks also to the company's poor performance, high executive compensation and support from some of the proxy advisory firms, several Yahoo! directors received over 35% "against" votes. Six days later, Terry Semel resigned as CEO.

Motorola shareholders should be upset at this company's performance. But Icahn's involvement is not a cure-all. It would be easy to be a free rider as a shareholder and think that you can leave it to Icahn to fix things. That's not enough. Many more changes need to be made at the board-level and within this company. Get out and vote.

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