We’ve been following the Motorola situation for some time now and you can’t say that Icahn doesn’t put his money where his mouth is. It was only a little over a month ago that we wrote about the Motorola Investment Thesis but Carl keeps popping up in the news on MOT.
Recently he’s been adding to his already very large stake in Motorola with purchases of over 3 million more shares last week at around 7 1/2. He now owns over 250 million shares.
Icahn is an insider so he clearly has more information about near-term business conditions as well as more details than we do about the company split which is now only a few months away.
We think that nearly any analysis suggests that MOT shares are undervalued. The market and the stock action though would seem to disagree. Most that have expressed their view have pointed to dreadful record that senior management has and the likelihood that they will continue to be destroyers of shareholder value.
Icahn represents an interesting counterpoint to this view precisely because he shares this point of view. That’s the very reason he has gone after MOT with a major campaign to reform it and made a huge investment. His level of disgust with the past several years of underperformance is probably at least equal to the most vehement critics that we have heard railing against any investment in the company.
So far few in the market share his optimism. If his open market purchases of stock have done little to move the price higher imagine were the stock would be today without it? It doesn’t look like many are joining him in his conviction that the shares will be worth much more in the future.
Another downside of Icahn purchasing stock recently is that it indicates that the company is not any material discussions about selling all or a major part of the company that we don’t already know about. (That would be material non-public information that would mean any insiders would not be able to transact in the shares.)
Although published early this year our strategic review and positioning analysis of the Motorola businesses is still useful in the context of preparing to value the post-split company. See the report via this link: R2-Motorola-Positioning-Document-0124010.pdf.
This week Greg Brown presented some updates about the post-Split Motorola. First of all the capital structure will be more efficient. While some restructuring amounts to “rearranging the deck chairs on the Titanic” this one will cause some immediate benefits. First of all health of the “cash cow” enterprise business will improve right away since their borrowing costs will decline and cash flow from operations can be earmarked for stockholder returns in that business rather than funding the losses in the mobile segment. (See below on that.)
Motorola Solutions is the main driver at this point and on separation will be a stable company with upper single digit growth, high operating margins, and possibly even a dividend.
The Evolving Android Business
In terms of new developments we did note the recent purchase of 280 North with some interest. The software development side of the Android business is what it’s all about in our view. (We have no intent on following the “old” Motorola cash cow business post-spinoff.)
It’s become clear inside Motorola that one outstanding mobile software developer in Silicon Valley is worth about 100 corporate developers in the mid-west. So this move represents a trend towards a more modern, plugged-in and design-oriented software development team in the Motorola Android business.
Beyond the people 280 North also brings elements of a development platform that is increasingly important and differentiated between different Android-based handset makers.
We expect this trend to continue and accelerate from here given that the Motorola Mobility business will be spun-off with $3.5B in cash to use to finance operations and make further technology acquisitions.
Importantly by the time the spinoff occurs the Mobility business should be running at or close to break-even, maybe even showing a little profit. Investors may be reluctant to put a high value on that hyper-competitive business but the stakes there are high enough to suggest a bet there is well-placed.
What still bothers us?
The main concern is execution on the mobile Internet side of the business. So far it as been good but not amazing. We’d like to believe that this is due in part to the legacy of the old “Motorola way” and something that will improve. But the temp of innovation, customer support and integration with the home networking and entertainment business has to occur with greater speed and consistency of quality. Things have been a little slow and patchy in places. For example why let HTC or Samsung have leading devices in the field for weeks or months? Things are going to move faster in 2011.
[Disclosure: The R2 Model Portfolio has a long position in MOT and so does the author at the time of this writing. Positions are subject to change anytime and without notice. This post should not be considered investment advice.]