Bring it on

Forgive yourself for sometimes thinking you had tuned into a broadcast of the World Wrestling Entertainment (WWE) that pitted the Undertaker against the Great Khali in a steel cage match. That is how extreme – and deliciously sensational – the long-running blood sport that pitted activist shareholder Carl Icahn versus the management of storied technology leader Motorola has been. You can almost hear somebody bellowing, ‘There will be blood!’

And the winner is… Icahn in a TKO. That’s because, early in April, Motorola’s board caved. In a sweeping defeat, Motorola agreed to Icahn’s demand to appoint his hand-picked executive, Keith Meister (previously dismissed by Motorola as unqualified), to the board. Motorola also agreed to consult Icahn on the fate of its mobile devices business. Motorola did not exactly go away empty-handed, however. In return, Icahn agreed to drop his proxy fight, vote to support the board at the annual meeting, and drop his multi-tiered litigation against the company. That means Motorola can sidestep what would have been costly litigation and it also can focus on the question of what to do with its sputtering mobile devices group. Perhaps even better, the Motorola board can breathe easier knowing that Icahn, who had suggested he would be publicly ventilating grumbles with the board’s stewardship, has buried this particular hatchet, at least for now.

Listen up: this story is not over. Governance insiders say that the Icahn v Motorola brawl just may be a preview of coming attractions at a company near you. Activist investors, with Icahn as the poster boy, are increasingly empowered and they are increasingly winning. Data assembled by FactSet SharkWatch, which monitors shareholder activists, says that companies increasingly are choosing to simply settle and give the activists at least some of what they demand. Just 32 percent of targeted companies took matters to a shareholder vote in 2007, down from 61 percent in 2002, the figures say. And big name companies are throwing in this towel, from the New York Times to Sovereign Bancorp and, of course, perhaps most notably Motorola.

‘The dynamics have shifted in favor of activist investors,’ warns Robert Profusek, chair of the M&A practice at Jones Day, speaking in general about market dynamics, not about Motorola in particular. Giving up at least some of what the activist requests just may be the smartest and shortest route. That often can be ‘a good strategic decision,’ adds Gerald Czarnecki, chairman of Deltennium Group, a governance consulting firm. ‘A proxy fight is expensive, the result is uncertain.’

The road to here

Back up a step and contemplate the crucial question: just how did Motorola wind up as road kill on the investment superhighway? Simple: it’s losing money by the bucket, the stock has been pounded (it slid from a high of $19.68 to under $10 per share), the once-respected CEO Ed Zander beat a hasty exit, taking an unplanned retirement in response to a crescendo of criticism from Icahn, and now the company is splitting itself up. How does a company with a market cap north of $20 billion find itself in this unenviable situation?

Icahn, for his part, had plenty of skin in this game. At year-end 2007, his stake in Motorola was estimated at around 2.7 percent (not quite $1 billion in value) but in the early months of 2008 he had been steadily buying. In late March, as Icahn dug in for a protracted fight, he raised his stake to around 6.3 percent, making him one of the top two or three shareholders. The clear message of his stock accumulation: he was not going away.

In addition to buying stock, Icahn filed a barrage of suits – aimed at forcing more disclosure of strategic information by management as well as details about the use of Motorola aircraft and property by senior management, members of the board, and their families – and he also had indicated the firm intention to pursue a proxy contest aimed at winning four seats at the company’s annual meeting in May. Along the way, Icahn blatantly questioned the competence and suitability of Motorola’s new president and CEO, Greg Brown, in a campaign that became increasingly public and personal.

A change of mood

Then all that changed on April 7, 2008, when Motorola and Icahn issued a joint release that effectively declared the end of the war. The statement read in part, quoting Brown, ‘We are pleased to have reached this agreement with Carl Icahn. We look forward to continuing the process we announced on March 26 to create two independent publicly-traded companies and we are pleased to avoid a costly and distracting proxy contest.’

‘This is a very positive step for Motorola in that shareholder representatives will have strong input into board decisions affecting the future of our company,’ said Icahn in the release. The activist further noted, ‘In addition, the Motorola board has also taken an important step forward for corporate governance in that the separated company which includes mobile devices will be essentially free from poison pills and staggered boards, both of which, in my opinion, serve to make democracy a travesty in corporate America.’

Who’s the boss?

In the bargain, Motorola also agreed to appoint William Hambrecht to its board and acknowledged (within the limits of confidentiality) that Hambrecht and Meister could be understood to serve as Icahn’s eyes and ears inside the company and that they would be reporting back to him.

Icahn got two board seats, not four, but experts did not hesitate to declare him the winner. ‘Icahn got most of what he wanted,’ says Andrew Felo, associate professor of accounting at Penn State Great Valley graduate school in Philadelphia.

One key point: ‘Activists just keep getting smarter. Where they used to seek to unseat the whole board, now they ask for a couple seats,’ says a leading Wall Street attorney who requested anonymity. Throwing out the whole Motorola board at Icahn’s behest surely would seem unreasonable to many neutral parties. But adding a pair of Icahn loyalists just might seem eminently fair, particularly given the considerable size of Icahn’s holdings. This attorney further adds, ‘The rules of engagement have changed. The board does not want to be seen as protecting management.’

Czarnecki agrees: ‘It often looks better to the board to let an activist have a couple of seats, particularly when the company has not been doing well. This may not end the fight but at least it should take the fight out of the public view and put it in the boardroom.’

Cui bono?

So how did other shareholders fare in the Icahn-Motorola deal? The jury of course is out – much will hinge on the disposition of the mobile devices business – but at least some observers say there may well be benefits for rank-and-file shareholders, too. Felo comments, ‘It’s good for a company to experience a disciplining force.’ In Icahn, Motorola has come up against a force that will relentlessly challenge and question compensation, expenditures and strategies. Saying ‘because it has always been done like that’ is not an answer that will be good enough for Icahn. Motorola, for its part, says it has always been vigilant in monitoring compensation and expenditures.

Betsy Atkins, who serves on four public boards including Reynolds American and who in the past has been allied with activist investors, is blunter: ‘Carl Icahn has triggered movement in Motorola and this will free up value for other shareholders. You can make the argument that he has been a positive catalyst for change. Motorola had been performing poorly, the company has been stalled. It needed a catalyst to get going.’

John McLaughlin, senior managing director at SMART, a consulting firm headquartered in Devon, PA, remarks, ‘Icahn creates motion; people like motion. Companies are owned by their shareholders and if he represents their will, let it be done.’

A growing movement

Now for the really bad news. ‘I believe we will see much more shareholder activism in many more companies,’ comments Felo. ‘It’s a down market. There will be more dissatisfied shareholders and that will lead to more shareholder activism.’

Particularly unsettling to the management status quo is the reality that – in the internet era – ‘activists have realized that it has become very cheap to conduct a campaign,’ says Felo. Put up a website, get mentioned in key blogs and, suddenly, in the space of 24 hours and with almost no expenditure, a dissident campaign can gain traction and notoriety. ‘This has changed all the rules,’ says Felo. Start churning out email – sent at no cost – and suddenly a full-tilt battle for control of a Fortune 500 company can be conducted on no budget, but at internet speed. That is a prospect that could make even the sturdiest corporate secretary tremble.

But it may get even simpler. Profusek says that recent years have seen a growing concentration of public company ownership in fewer hands. ‘In perhaps 9 out of every 10 companies, the top 20 shareholders own an effective majority.’ That makes life much easier for an activist. With a morning’s worth of phone calls, an activist can survey the field, offer some concessions, look for common ground and put together the outline of a deal to shake up the status quo.

Just how can a company defend itself amid the predicted epidemic of shareholder activism? Good results are probably the best defense, the experts say. Motorola’s vulnerability hinged on its sagging performance – it lost $553 million in 2007 and short-term expectations going forward were not bright.

But the other poignant failing on the part of this once-revered company is that it came up empty when it sought to line up support. ‘Every organization needs staunch defenders,’ says Billie Blair, an organizational psychologist and president of Leading and Learning, a Los Angeles-based consulting firm. Typically this means management allied with the board and perhaps also with a helping hand from large shareholders. Motorola lacked that. ‘No one appeared to value the company enough to fight for it,’ she says. A company with ample defenders probably can tough it out, but getting there may also entail delivering consistent results.

The bottom line is that ‘people apparently believed Motorola needed change,’ says Blair, and they voted for that by signaling indifference when it came to supporting management. And that leaves one act left to play: ‘Now we’ll see how positive the market is about the changes planned for Motorola,’ says Blair. ‘That is when we will see exactly how well this worked out.’