February 5, 2007 4:00 AM PST

Razr-thin margins in Motorola strategic divide

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But a lot of Motorola's handset success has been tied to its wildly popular ultra-thin phone, the Razr, which debuted in 2004. Even though the company is still selling the phone in high volume, the product is now being sold by all major carriers in the United States, and as a result, prices have fallen drastically. This in turn has collapsed profit margins.

Motorola introduced other new phones recently, namely the Krzr and the Rizr, but sales of these phones in the fourth quarter were unable to compensate for the losses caused by falling Razr prices.

"He has virtually unlimited resources, and he is always in it to win. So if your interests are aligned with his, then it's definitely a good thing."
--Michael Stortini, Robino Stortini Holdings, on Carl Icahn

Meanwhile, Motorola's competitors, Nokia and Sony Ericsson, a joint venture between Japanese consumer electronics maker Sony and Swedish telecommunications equipment maker Ericsson, have recently reported strong results. Nokia, the No. 1 handset supplier in the world, reported that profits surged 19 percent in the fourth quarter, even though the average price of its handsets has been steadily falling. In the fourth quarter, the average price was $116 compared with a year ago, when the average price was $128.

Sony Ericsson, which recently climbed to the No. 4 spot in handset shipments, is addressing the high-end market with expensive phones. The strategy is working well, helping boost overall profits for parent company Ericsson in the fourth quarter.

Motorola's management team says its priority is to return to double-digit operating margins by the second half of 2007. It plans to do this by controlling costs and focusing on improving gross margins with a slew of new phones designed to wow consumers. But Zander also said the company has a long-term strategy to diversify its business by boosting its presence in new markets, such as mobile enterprise and IPTV.

In 2006, Motorola announced several acquisitions to help it build expertise in those markets, including the purchase of Netopia, which makes home gateways, and Tut Systems, which has IPTV video-encoding technology. Motorola will add this technology to its "Connected Home" division, which already includes its cable set-top box family of products.

And the company's purchases of Symbol Technologies, which makes bar-code-scanning technology, and Good Technologies, a mobile-software developer, will help Motorola develop new products for the corporate market.

Motorola is also investing in new technologies, such as WiMax. In August, Sprint Nextel selected Motorola as a strategic partner to help it build a new 4G wireless network built on the wireless digital communications system.

"We have the right strategy, seamless mobility and the mobile Internet," Zander said during the conference call in January.

But for Icahn, this strategy doesn't appear to be enough. He wants more immediate results, and he believes they could be obtained through a more aggressive share buyback program, which would likely force Motorola to take on more debt.

Currently, Motorola's debt load is only $4.4 billion, and Dave Devonshire, Motorola's chief financial officer, has said he doesn't expect it to increase. Adding more debt to a telecom equipment maker's balance sheet goes against conventional wisdom, because manufacturing equipment is a capital-intensive business, so keeping debt loads relatively low is often seen as a positive.

Icahn has made a name for himself in recent years as a so-called investor activist. Last year, he tried to take over the media conglomerate Time Warner through a proxy fight. He wanted Time Warner's CEO Richard Parsons to step down, and the company split into four parts to unlock shareholder value. Eventually, he backed down when it became obvious that investors weren't supportive of his radical plan. But he did so only after the company took some of the steps he had proposed.

Michael Stortini, who manages the private hedge fund Robino Stortini Holdings, recently settled litigation with Icahn and his associates over a deal the two groups were involved in. He said Icahn is a whiz at maximizing shareholder value.

"I'd never be partners with him again," he said. "But as a Motorola shareholder, I'm glad to see him get involved. He has virtually unlimited resources, and he is always in it to win. So if your interests are aligned with his, then it's definitely a good thing."

But analysts covering Motorola say it's unlikely Icahn would have much power to do anything, even if he were elected to the board of directors. Jeff Kvaal, an equities analyst with Lehman Brothers, wrote in a research note this week to investors that "should Carl Icahn achieve a board seat, we believe changes to Motorola's plan would be modest given the size of the board (there are 13 board members) and our view that Motorola's 2007 plan has investor support."

CNET News.com's Dawn Kawamoto contributed to this report.

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4 comments

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motorola
moto rocs

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Posted by darix2005 (31 comments )
Reply Link Flag
They should partner with Microsoft
and co-venture the rumored Zune phone
Posted by aka_tripleB (2211 comments )
Reply Link Flag
It's not about the shares buyback
It's not the buyback he's after. If sales are dropping and the
stock is tanking, the last thing you want to do is clear out your
cash positions. Cash is soo important when things go bad, you
have no idea.

What will happen to Motorola if it liquidates its cash assets, then
one day in the future the company tanks horribly and needs
some extra cash just to keep things going? It can go bankrupt.
Banks may not want to touch it at all, and bond holders would
want high returns on the now-junk bond, worsening the
situation.

Mr. Icahn just wants to scare the management, because he is
pissed that he put a load of cash into the company right before
it took a dive.
Posted by dimasy (10 comments )
Reply Link Flag
KRZR
Anyone have a Krzr? I hear it's a slimmer version of the RZR. Any thoughts from current users?

- Alan Safani
Posted by Alan Safani (2 comments )
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