The differences between Activist Shareholders

The tale of two companies – Motorola and Sprint – is also the tale of the approach of two activist shareholders, Carl Icahn and Ralph Whitworth. While Mr. Icahn’s approach to unlock shareholder value might be threatening to the status quo, his approach has also the longer term health of the company in mind. Mr. Icahn has simply asked that the roughly $12 billion cash mountain should be returned to the shareholders through a stock buy back. When it became apparent that the company has to work through its current operational difficulties, he even announced that the company should not buy back stocks until these problems have been corrected. He has offered his help and insight, but has not demanded (yet?) the company to change course, divest business units, or make any other radical changes. An approach like Mr. Icahn’s has truly the long-term health of the company and therefore the maximum benefit of investors in mind.

Mr. Whitworth on the other side, is according to the Wall Street Journal more interested in changing the course of the company such as a reduction in capital investment, sale of its fiber-optic network or long-distance operation. While there have been certainly made mistakes before, during, and after the merger of Sprint and Nextel, all the above mentioned options would surely be only beneficial in the short term and disastrous in the long term.
Reduction in capital investment: Sprint is already lagging behind the other wireless carriers in perceived wireless call quality, while having two wireless networks and greater geographical coverage than the other carriers. Spending less money on network will only widen the gap and make perception, which is sometimes correct, a certainty. I was present at the bell ringing ceremony at the New York Stock Exchange when the new Sprint was for the first time publicly traded. In the following press conference I asked what Sprint’s plans were in terms of capital expenditure and Paul Saleh, CFO, replied that the company would reduce its capital expenditure because it thought it was not a wise use of shareholder money. I just replied that the last guy who said that to me was John Zeglis and we all know how that story ended. A few months later, Sprint, in my opinion, correctly changed its attitude and increased capital expenditure. This is a critical investment in the future of Sprint and the company cannot afford to let Verizon and AT&T outspend them on the wireless network and increase the gap in perception and subsequently in net subscriber additions. All the cool phones and services are worth nothing if the call doesn’t go through.
Sale of the fiber-optic and long-distance network: Sprint is backhauling the vast majority of its own traffic over its own network. This is a core asset that helps to lower its operating cost. While it is true that there is a glut of fiber available in the major routes between most hubs, there is a relative scarcity in the smaller markets. Selling off these assets would only provide a short term boost to profitability but most likely put Sprint at an disadvantage when at the same time their two larger competitors can rely on their own fiber-optic and long-distance networks they either had already in territory or acquired when they purchased the old AT&T and MCI respectively.