Shareholder Activism and the Free Markets
One share, one vote. Elimination of poison pills and staggered boards. The ability to wage proxy contests. In short, essential elements of the checks-and-balances among shareholders, corporate managements and Boards of Directors. This is why people like Carl Icahn and other activist investors serve a critical function in the capital allocation process. If a bunch of corporate cronies are intent on unfairly padding their wallets at the expense of shareholders, placing downward pressure on the stock price, buy up a stake and agitate for change. If a management team is off pursuing large ticket, low probability R&D projects, the strategy of which is perceived negatively in the marketplace, gain a toehold and clamor for a share buyback. This is a story we’ve seen acted out again and again. But as those with activist tendencies like Mr. Icahn gain greater resources and become more prominent, the types of companies under attack are broadening as well. It’s not just the inefficient conglomerates that are in the cross-hairs of activist investors, but technology companies, pharmaceutical companies and others with sizable R&D budgets that require investment to keep their product pipelines robust. Is it ok to go after these companies and demand a massive leveraging of the balance sheet, funding aggressive stock buyback programs that substantially limit R&D resources?
An example of this case currently being played out is that of Motorola. A venerable technology company that, until recently, had runaway success with its sleek, ultra-thin wireless handsets. A company whose DNA is rooted in R&D, a developer and manufacturer
of a historically wide range of leading-edge products such as radios,
chips, and wireless devices. It has recently, however, fallen on hard times as the competitive marketplace has heated up and its product portfolio has fallen behind. This has had a substantial negative effect on its stock price, losing about $20 billion of market cap - 33% - over the past five months. This spurred Mr. Icahn into action at the end of January, announcing his intention to seek a seat on the Motorola Board and to press for more aggressive stock buybacks. Shares of his new target jumped 6.9% on news of his involvement, but have subsequently given up these gains over the past two months. In the wake of his saber-rattling, many in the analyst and journalist communities have questioned the appropriateness of his attack on an R&D-intensive company like Motorola and called for him to back away. Management needs the financial flexibility to invest in R&D and acquisitions to fuel growth, they say. But what of the fact that Motorola currently trades at the levels it did six years ago? Is this reflective of a “technology” company, a “growth” company, or any other descriptive term one might use for a company that has an array of high-ROI projects at its disposal? I’d say not.
If Motorola management has a good plan for growth, can clearly articulate the plan and sell the plan to its shareholders, then let it make its case. It has nothing to worry about. Mr. Icahn’s 2.7% stake, while meaningful, doesn’t begin to give him the power to sway either the shareholder base or the Board if his views are not shared by many. Let the market exercise its judgement, something that it does quite well. But don’t ask Mr. Icahn to relent simply because it is “inappropriate.” This cheapens the checks-and-balances so necessary for shareholder-driven decision-making and ensuring that capital is allocated in the wisest manner possible. If Motorola management is shaken by Mr. Icahn and working overtime to address his concerns, then they’ve truly got bigger problems to deal with - like the right strategy for the company.
