It's increasingly clear that Motorola Inc.'s (NYSE: MOT) plan to split into two companies to separate its ailing cell phone business from its other telecommunications equipment operations is not appeasing shareholders. The latest sign came Monday evening at the company's shareholder meeting, where investors did more than just make a lot of noise. They passed a resolution loosening management's control over executive pay by making it subject to an annual shareholder vote.
FT.com, which covered the meeting, quotes shareholders as saying they were "embarrassed and outraged" by the company's decline,and calling the plan to split into two a "cop out" that does nothing to revive the company's cell phone business.
In the days leading up to the shareholder meeting, activist investor Eric Jackson, who heads a group called Motorola Plan B representing 135 investors holding 600,000 Motorola shares, had urged shareholders to vote against three longstanding Motorola board members, who he said had failed to learn the lessons of two boom-and-bust cycles (the StarTac and the Razr) -- namely, that phones are fashion, and fashion gets old very fast.
Posted Apr 24th 2008 12:00PM by Tom Taulli Filed under: KKR
Lately, there have been some scary stories -- such as in BusinessWeek and Forbes.com -- about the buyout of Freescale, which is a major semiconductor operator. The transaction came in September 2006 at $17.6 billion.
The latest earnings report was anemic. Plus, the company's bonds are selling at distressed levels. And CEO Michel Mayer quit his post in February (but don't cry for him as he took millions in a nice payday). And of course, Freescale's key customer, Motorola, Inc. (NYSE: MOT), is ailing.
So, might this prevent further buyout deals in the semiconductor space?
Not necessarily. According to a piece in Financial News, it looks like KKR is still bullish on the sector. Actually, the firm made an investment in the sector, NXP, which has taken a drubbing.
But, then again, private equity is supposed to take the long view, right?
Well, KKR thinks that NXP could be a vehicle for consolidation. And, the firm has no shortage of cash to pull it off. Besides, NXP recently sold its wireless assets to STMicroelectronics for a cool $1.5 billion.
The company still has to report earnings as though it was a public company because of its ratings and because of its public debt. The company has shown that over the last twelve months, the company's adjusted EBITDA was $1.55 billion.
Net sales for Q1-2008 were $1.405 billion, up from $1.361 Billion in Q1-2007 and down from $1,539 billion in Q4-2007. Unfortunately, the company is still posting an operating loss of $152 million for the quarter, compared to $654 million in operating losses in Q1-2007 and $595 million in Q4-2007. The net loss after items for this last quarter was $245 million, also down from a loss of $539 million in Q1-2007 and down from a loss of $525 million in Q4-2007.
Its cash and total short term investments were $1.25 billion on March 28, 2008, compared to $751 million at the fourth quarter ending December 31, 2007; and its accounts receivable were $680 million and inventory was $732 million. But here is where things get tricky. Its long-term debt is $over $9.3 billion alone. Of the company's total asset base of $15.197 billion, more than $5.3 billion is goodwill and more than $3.6 billion was listed as intangible assets.
If you go back to the BloggingBuyouts article, "Why private equity firms avoid technology companies," you'll see that being a highly leveraged technology company that requires high capital expenditures isn't always the greatest place to be be. Unfortunately for all the private equity partnersm the company can't live on EBITDA alone and many believe that Freescale will need more capital and thus more leverage.
The original private equity deal was put at $17.6 billion for an enterprise value. So far that isn't turning out too great. Who knows, maybe a re-IPO of Freescale isn't too far off.
Jon Ogg is a producer and editor of the Special Situation newsletter for 247WallSt.com.
If you've ever wondered why so many low-P/E ratio technology companies haven't been gobbled up, there is a really good explanation: R&D, leverage, and volatility.
Business Week just ran a great cover story titled "When a Buyout Goes Bad" for this week's magazine. The case in hand is the old private equity buyout of Freescale, which was the chip business from Motorola Inc. (NYSE: MOT). This talks about a company that was turned around from the edge of the cliff by a great tech leader who created a great stock again. Then the $17.6 billion buyout came from a group led by The Blackstone Group (NYSE: BX), Carlyle Group, and Permira Advisers. This buyout came after being in a competing bid from a consortium led by KKR, Bain Capital, Apax Partners, and Silver Lake Partners.
Last year the company's revenues fell 10% while the chip sector revenues grew by 5%, then Motorola announced a spin-off or sale of its handset business, and then there is the issue of the $9.5 billion in debt that was clumped on top of the company to get the private equity buyout done.
Unless you are selling transistors and capacitors or just plain Jane DRAM, technology companies require heavy R&D commitments. This is why historically technology companies used to come public back before the 1990's "get rich from tech stock option awards" became the norm. The accounting changes required investor backers of a different group to mark down 15% of their $7 Billion stake as well. In fact, it notes that it is having a hard time ponying up the $1.2 billion for R&D and $400 million for capital expenditures needed for Freescale. And now there are inventory problems.
For me personally, I am not all that surprised that Freescale was a temporary success. One night right shortly before Freescale was spun-off by Motorola, I was flying from Austin to Chicago. I spoke to two workers that said they were low level managers for Freescale. When they called the company "Free-Fall" and told me about some of their pension or retirement issues and stock option plans getting mixed up (not for the better, at all), it left a bad taste in my mouth. Then when this one went private with that much debt and knowing what comm-chip R&D percentages of revenue were, I thought the billionaires were drinking too much of the cool-aid.
You should read that article as it puts it well into context. This is why niche technology companies generally end up being acquired by other niche technology companies or by larger tech companies that are competitors or that can complement each other. In mid to late-2006 you started seeing the private equity frenzy go into overdrive.
If you want good news or the silver lining, I do actually have some. I think that there will be another wave of public technology companies that get acquired. But the buyers will almost all be LARGER public technology companies. Private equity and technology can mix, but the deals need to be smaller deals with less leverage and in companies that require less R&D.
Motorola Inc. (NYSE: MOT) said Wednesday it will split into two independent, publicly traded companies, thus separating its struggling mobile-phone business from its broadband and mobility-solutions operations.
The move comes amid a long-standing battle with activist investor Carl Icahn, who has been urging the company to shed the handset unit.
Icahn, who owns just over 6% of Motorola, has been actively seeking representation on the company's board. On Monday, he sued the Schaumburg, Ill-based company in an attempt to secure records relating to the hiring of senior executives and corporate strategy, especially as it relates to its mobile devices business.
The Wall Street Journal's online edition is reporting that billionaire financier Carl Icahn has rejected an olive branch from Motorola Inc. (NYSE: MOT) that would have granted him two seats on the struggling company's board.
Icahn has been pushing a four-person slate: Frank Biondi, the former CEO of Viacom Inc.; William Hambrecht, the co-founder of the former investment bank Hambrecht & Quist; Lionel Kimerling, professor of engineering at Massachusetts Institute of Technology; and Keith Meister, CEO of Icahn Enterprises.
Motorola reportedly told Icahn that it would seat two of these nominees, as long as it wasn't Meister. Icahn didn't bite, telling the WSJ that Meister's rejection was "intolerable and reprehensible."
Nortel (NYSE: NT) and Motorola (NYSE: MOT) are in negotiations about putting together their wireless telecom equipment businesses. According toThe Wall Street Journal,"If consummated, the talks will create a joint venture that likely will have sales of about $10 billion."
Nortel has total revenue of just over $11 billion, so half of its assets would go into the JV. But, Nortel has $3.8 billion in long-term debt and had operating losses in two of its last four quarters. The unit that houses Motorola's network equipment operation had revenue of $2.7 billion last quarter, but its operating income fell to $192 million down from $223 million in the quarter a year ago.
Childrens Place Retail Stores, Inc. (NASDAQ: PLCE) is seeing shares surge this morning by some 20% as a Fed Filing shows that former CEO/Chairman Renee Dabah is trying to take his 17.2% stake up to a full buyout at $24.00. With a 52-week trading range of $14.92 to $58.89. you can imagine some holders will be fighting this as a "take-under".
Jerry Yang's email to employees yesterday sure sounded like he was leaving an out for him to accept the Microsoft Corp. (NASDAQ: MSFT) acquisition of Yahoo! (NASDAQ: YHOO). Interestingly enough, Alley Insider has some alternatives in mind for Yang to pursue.
The proposed merger of BHP Billiton (NYSE: BHP) and Rio Tinto plc (NYSE: RTP) just looks like it has too many hurdles to overcome, despite a hiked bid. China and Japan are both against it, and the company would just be too darn big.
IAC/InteractiveCorp. (NASDAQ: IACI) sure sounds like it wants to pursue a total five-way break-up despite outside efforts to unseat Barry Diller as CEO.
Carl Icahn boosted his stake in Motorola, Inc. (NYSE: MOT) in a filing yesterday. He's going to need more than stock buybacks and a handset unit sale to dress this pig up for prom.
Is Anheuser Busch (NYSE: BUD) about to make a merger with another brewer? You can imagine that regulators will be scrutinizing this one.
On the heels of a second activist campaign targeting Motorola Inc. (NYSE: MOT), Carl Icahn, on Tuesday, Feb. 5 pleaded with institutional investors to support his efforts at American corporations.
"The real major problem in our economy is that companies are run very poorly and you have no idea how badly they are run until you get inside there," Icahn told institutional investors, brokers and investor relations officials at investor advisory group RiskMetrics' 2008 governance conference in New York. "You people [institutional investors] can do something about it and if everyone does what I tell them to do, I think I will be out of a job."
Icahn on Feb. 1 launched a second proxy contest at Motorola. The effort comes only a few months after Icahn lost last year's campaign to elect a director candidate to Motorola's board. His drive fell short by a couple hundred million votes. He declined to comment on the campaign nor reports that he has accumulated a substantial position in retailer J.C. Penny Co. (NYSE: JCP).
Motorola's (NYSE: MOT) plan to spin-off its handset division isn't good enough for Carl Icahn: "We believe Motorola is finally moving in the right direction, but certainly still has a long way to go."
Last year, Icahn was rebuffed in his efforts to gain a seat on the board and send then-CEO Ed Zander packing. With the company continuing to underperform badly, Icahn's latest effort to add his people to the company's board of directors could find a better reception the second time around.
I'd like to ask that big institutional investors who voted against Icahn's proxy contest what they were thinking. In spite of his reputation as a rapacious vulture, Carl Icahn is someone that every investor should be delighted to have on the board of directors at a company he owns a stake in.
Back in October, Icahn said this about Motorola: "There is value there, and if that value doesn't manifest itself I, as an activist, would think very seriously about coming back."
I think it's fair to say that the value has failed to manifest itself and now King Icahn is back with a vengeance. Hopefully Wall Street will listen up this time.
Struggling cell phone and telecommunications equipment maker Motorola Inc. (NYSE: MOT) said late Thursday that it is considering a restructuring to help boost the performance of its cell phone business that could include a spinoff of the unit.
The announcement follows a full year of turmoil for Schaumburg, Ill.-based Motorola, which in 2007 became the subject of a proxy battle by activist shareholder Carl Icahn who attempted to win a seat on the company's board and maintained that a dramatic shakeup was required to reverse the loss of cell phone market share.
Although Icahn was defeated in his efforts, Motorola's problems worsened throughout the year, culminating with the resignation in November of CEO Ed Zander and a warning earlier this month that it would post a first quarter operating loss due to persistent weakness in its cell phone division.
Richard Windsor, an analyst with Nomura International, must have time on his hands. In a memo to clients he passes along the opinion that Motorola (NYSE: MOT) may exit the handset business "and concentrate on becoming and enterprise and government company," according to a report at MarketWatch.
The buyer of the handset business could be a Chinese electronics firm.
The trouble with the speculation is that a firm in China would have the same trouble that Motorola does. With its share of the world handset market down from about 22% two years ago to 12% now, it does not have a single flagship model, like its old Razr, to get the company back on track. Larger rival Nokia (NYSE:NOK) has 40% of the worldwide market. Samsung and Sony-Ericsson are also taking share.
To put a fine point on it -- Motorola does not have anything to sell.
Douglas A. McIntyre is an editor at 247wallst.com.
Motorola (NYSE: MOT) announced weak earnings yesterday, sending the stock down sharply. Worse, the company gave no indication that it had a plan for a brighter future. Could this result in Carl Icahn, who owns more than 3% of the company, escalating his battle to shape the company?
Icahn has been trying to get a seat on Motorola's board, but to no avail. He did, however, succeed in forcing CEO Edward J. Zander out in December. Zander hasn't left the building, though, since he remains as chairman. There is speculation that the new and unimproved results may spark further action by Icahn.
DealBook is asking the same question, arguing that Icahn's preferred strategy of breaking up the company is becoming a more likely possibility. Icahn wants results now, and a breakup will be more effective in moving the share price than waiting for new technologies to develop. Motorola is a large conglomerate, and getting rid of the troubled handset unit, which has been unable to match the success of the RAZR, would give the company a quick boost -- and Icahn a quick profit.
According to Thomson Financial, there was an increase in the number of battles waged by activist investors this year, but also a decline in their success rate. Activist investors emerged victorious in 39% of their battles, compared to 20% for the incumbents they took on. The rest remain unsettled or, like the case of Motorola (NYSE: MOT) ended in split decisions.
Of course, activist investors would probably define success as earning a strong rate of return, rather than just booting out management. There have been many cases where activist investors have won the battle -- seats on the board, etc. -- but lost the broader battle of shareholder value creation. Herb Greenberg wrote about a recent example of that involving Carl Icahn.
2008 should present unique challenges for the activists. With the credit market tight and unlikely to strengthen anytime too soon, the favorite tactic of activists -- pushing firms to put themselves up for sale -- may not yield fruit the way it once did.
In the 1980's, corporate raiders gained riches -- and infamy -- by breaking up companies, cutting jobs, and slashing benefits. In the late 90's, they remade themselves as corporate governance activists, taking on entrenched managements and supine boards. Their greatest successes came when they pushed companies to sell themselves.
But the window for that strategy may be closing, at least for the time being, requiring yet another reinvention: activists who help companies in improving operations and shareholder value as stand-alone public companies.
Research in Motion Ltd. (NASDAQ: RIMM) -- volatility up prior to unconfirmed Microsoft Corp. (NASDAQ: MSFT) buyout chatter. RIMM is recently trading up $1.33 cents to $83.11 on unconfirmed speculation MSFT is considering the purchase of RIMM on rumor of Google Inc. (NASDAQ: GOOG) introducing GPhone. RIMM has a market cap of $45 billion. MSFT has a market cap of $267 billion. RIMM is expected to report EPS on October 4. RIMM September option implied volatility of 47 is above its 26-week average of 42 according to Track Data, suggesting larger risk.
Tellabs Inc. (NASDAQ: TLAB) -- volatility elevated into renewed report of Nortel Networks (NYSE: NT) interest in TLAB assets . TLAB, a designer and marketer of equipment to providers of telecommunications services, is recently up $0.45 to $10.70. Light Reading reported NT has emerged as the most recent suitor for TLAB. Nortel, Motorola Inc. (NYSE: MOT) and Nokia Corp. (NYSE: NOK) have been frequently mentioned as possible buyers of TLAB over the last five years. TLAB over all option implied volatility of 42 is above its 26-week average of 37 according to Track Data, indicating larger price risk.
Daily M&A update is provided by Stock Specialist Paul Foster of theflyonthewall.com.
BloggingBuyouts is provided for informational purposes only. Nothing on the service is intended to provide personally tailored advice concerning the nature, potential, value or suitability of any particular security, portfolio or securities, transaction, investment strategy or other matter. You are solely responsible for any investment decisions that you make. The contributors who provide the content of BloggingBuyouts may, from time to time, hold positions in the securities discussed at the time of writing and they may trade for their own accounts. Such holdings will be disclosed at the time of writing. By using the site, you agree to abide to BloggingBuyouts' Terms of Use.
BloggingBuyouts is the best resource for news, opinion, and research on the least understood, most powerful force driving financial markets today -- private equity investing. Michael Rainey, editor.
For more coverage of America's favorite publicly traded stocks, check out BloggingStocks
It's increasingly clear that Motorola Inc.'s (NYSE: MOT) plan to split into two companies to separate its ailing cell phone business from its other telecommunications equipment operations is not appeasing shareholders. The latest sign came Monday evening at the company's shareholder meeting, where investors did more than just make a lot of noise. They passed a resolution loosening management's control over executive pay by making it subject to an annual shareholder vote.
Lately, there have been some scary stories -- such as in 
and 
. He also operates 
Research in Motion Ltd.
