Under Motorola's Hood
Bear Argument
By
Todd Lebor (TMF TeeTime)
Chris, what can I say, except buy a metronome instead. It will provide the same regularity of ups and downs that Motorola does.
Right now shares of the Schaumburg, Illinois, giant are trading at the same price they hit on December 18, 1998, and May 15, 1998, and October 3, 1997, and January 2, 1997, and July 10, 1996, and November 22, 1995, and January 5, 1995. Notice a pattern here? For the last five years, Motorola has hopped, skipped, and jumped around a $20 share price. And over that same five-year period, Chris Galvin, the chairman and CEO, collected more than $10 million in salary and bonuses. That amount of course ignores the millions in restricted stock grants received by him and other key members of his well-oiled (translation: slick) management team.
In 1994, Fortune called Motorola "the company that almost everyone loves to love." Then in 1998, an investment manager was quoted as saying, "They're one of the least loved stocks on Wall Street and they've earned it." Ouch. Now that's harsh. Nice turn around, though. Too bad it was in the wrong direction.
Da ta da. Here they come to save the day! The crack management team to the rescue. In June of 1998, Galvin and gang announced a $1.95 billion charge (no that's not a typo) along with 15,000 layoffs. This should stop the bleeding, right? Actually, the 15,000 turned into 20,000, and 1998 earnings -- oops, I mean loss -- came in at a stellar $1.61 per share. Revenue growth was nonexistent for 1998. However, 1999 proved to be the icing on the cake. Revenue growth was an anemic 5.2%. Gross profit was down and market share was disappearing faster than you (yeah, you, Chris) when it comes time to pay the tab at the Virginia Beverage Company.
Let's take a closer look at the choice of CEOs at Motorola. The apple never falls far from the tree in Schaumburg. Galvin is the grandson of Paul Galvin, the founder of Motorola. Ah, yes. Nothing makes me feel all warm and fuzzy inside more than a company run by a third-generation rich kid. Find me my checkbook.
Of course, Galvin does have his 3.8 million (beneficially owned) shares to worry about. Combining his shares with the 15.2 million controlled by his father (who ran the company for 30 years and still sits on its board), and subtracting out the 2.0 million shares that both parties "disclaim beneficial ownership of" (I'll take 'em), we arrive at about 17 million shares. According to the last proxy, the Galvin's only have to answer to Fidelity and its 50 million shares. For shareholders' sake, I only hope that somebody from the Boston-based mutual fund giant has the muster to pull the plug before the next multibillion-dollar charge.
I do have something nice to say about Galvin. At least he was smart enough to hire some outsiders to help him run Motorola's divisions. Maybe he should ask one of these division heads for help in deciding what business Motorola is in. Is it a semiconductor manufacturer (22%), a handset maker (34%), a cable box maker (10%), or what? Motorola has six divisions and an "other" and is known for being decentralized, yet bureaucratic. Sounds like the perfect combination to me!
Over the last few years, while Motorola was trying to figure out how to put DNA into a robotic dog, the competition has been stealing market share by the bucket-full. During these fateful five years (1995 to 1999), Motorola's U.S. handset market share went from a dominating 54% to a second-place 23%. They completely missed the boat on digital phones. In fact, even today, Motorola is still spitting out millions of analog phones a year. Psst, it's the year 2000. Analog is so '90s.
Motorola shares stagnated while Nokia <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NOK)") else Response.Write("(NYSE: NOK)") end if %>, the number one manufacturer of handsets in the world with more than 30% of the market share, saw its ADRs increase 20-fold over the same five years. Not a proud moment for American leadership in the technology boom. Let's just hope that Motorola does not go the way of that other has-been electronics giant outside of Chicago -- Zenith. Who, you say? My point exactly.
So how did management get caught off guard by the move to digital. Nobody seems to know. There are theories ranging from incompetence to greed. Motorola attempted to hang on to their comfy margins too long. Speaking of incompetence: Perhaps, we should ask Steve Jobs -- Apple's <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AAPL)") else Response.Write("(Nasdaq: AAPL)") end if %> CEO -- what he thinks of Motorola. Last October, when Apple started its own series of pre-announced earnings shortfalls, rumors were that Apple missed its numbers partially due to Motorolas inability to produce enough Power PC chips. Maybe Motorola was trying to get back at Apple for its failure to profit from MacIntosh clones.
Over the years, Motorola has become synonymous with failed execution. Witness last week's press release warning of lower than anticipated fourth quarter sales and earnings. Why even announce it? Motorola may be the first company to get sued for surprising to the upside! Delays in the expected cost reductions read the press release. Thats not a slowdown in handset sales. That is failed execution. In fact, just two days prior, Nokia upped its revenue growth numbers and increased its prediction of the global handset market to one billion units by 2002.
I have saved the best for last.
Iridium, Iridium, Iridium. Need I say more? I bet that sent chills up the spines of a few Motorola execs. $2.7 billion down the tubes for 66 multimillion-dollar satellites. A recent Fortune article said it best: "The term burn rate will take on a whole new meaning if Iridium drops its 66 satellites out of the sky, something company executives say will happen if the once high-flying satellite-phone company liquidates its assets." Great, the lawsuits can keep the legal team busy. At least somebody over there will have something productive to do next year.
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