Readers of this blog know I am a big fan of Motorola. From a moribund company laying off tens of thousands of employees, in just 3 years Motorola has become a financially stronger, more profitable and much higher growing company. By using Disruptions and creating multiple White Space efforts, the company’s equity value has more than doubled under new leadership (see chart here.)
But recently, Motorola’s equity value dropped. The company announced it would miss an earnings forecast due to lower mobile phone margins. Note, Motorola did not say sales or earnings were declining – because both were up substantially. Market share had grown in all its key markets and products, and revenue growth was on track. The company did not stall, but it did miss an earnings forecast. At the time I blogged that investors should look at other key metrics beyond the earnings miss, since the company’s efforts all portend a great future with much improved revenue and earnings. But I was in the minority, as the majority of analysts unleashed a series of concerns about Motorola’s ability to keep profitably growing.
And that’s when Motorola’s management blinked. Instead of taking to the airwaves with its story of planned growth in order to reset investor expectations, leadership chose to announce a 3,500 employee lay-off (see article here.) And that created a target for corporate raider, Carl Icahn. Today he announced that he owned 1.4% of Motorola shares, and he wants a seat on the Board of Directors (see article here.) On CNBC’s Faber report (see article here), Mr. Icahn informed investors he wanted to pay out the company’s $10B cash hoard in a special dividend, sell several businesses, take on substantial debt and use cash to buy up outstanding shares. Innovation be danged! Mr. Icahn wants to take the money and run.
When public speaking I ask audiences what the fastest way is to create cash value in a business. I tell them you can immediately create cash value by selling the desks, chairs, copiers, intellectual property, new product designs, customer lists, distributor contracts and vendor agreements. Then you can layoff the workforce, because in the short term they are purely cost. "But what about tomorrow, next week, and next year?" is the audience’s standard reply. And that is the key. For everyone can see that by selling these assets it kills the ability to create what might be far greater future value. Somewhere, someone has to invest in White Space, or there is no innovation nor growth.
Phoenix Principle companies create above average value by combining profitability with growth. By using White Space to develop new products, new markets, new customers, new services and launch innovation of all kinds these companies create value. Managers that optimize the business, run it for immediate cash, destroy value by seeking to get the most possible cash as fast as possible. And that is Mr. Icahn – shooting at the Phoenix in order to get meat today rather than generate more value from many eggs and chicks both today and tomorrow.
How did this happen to Motorola? The leadership did not do an effective job of communicating their future opportunities. Google, Cisco and Microsoft all have a cash hoard, a good credit rating and several businesses they could sell. They also have an equity value (aka stock price) high enough that it reflects the future expected value. Motorola’s leadership did not shed the old mantle of the stodgy midwestern company. Thus when iPhone was announced at MacWorld it eclipsed the fact that a similar product (ROKR) has been on the market from Motorola for several months and already sold more units than iPhone predicted to sell in its first 24 months! Phoenix companies not only have to follow The Phoenix Principle, they have to get investors on board to the expectations of future growth and profits.
I am a Motorola shareholder, which should surprise no one that has read this blog. But I am not overjoyed that my investment is worth more today due to Mr. Icahn. Mr. Icahn will at best put a few extra dimes in my pocket short term. But as a Phoenix company Motorola can put many dollars in my pocket soon enough. If Mr. Icahn succeeds with his plans he will kill the bird laying the proverbial golden eggs, and that is in fact bad news for investors, employees, suppliers and customers who will see Motorola lose market share to Nokia, Sony, RIM and others. And Chicago will watch another great company, like happened at Sears, move from market leadership to the whirlpool of demise.