BusinessWeek: Motorola's Zander "Out of Scapegoats"

From last week's BusinessWeek by Roger O. Crockett and Olga Kharif:

In mid-May, Motorola's beleaguered CEO Ed Zander was starting to feel optimistic. Zander had just unveiled a new phone lineup and for the first time in months, headlines would focus on something other than missed financial targets (see BusinessWeek.com, 5/16/07, "Motorola's Gamble: Substance over Style"). "I think we're seeing the transformation beginning," he told BusinessWeek in an interview after the event.

Any change for the better was woefully short-lived. Two months on, Motorola (MOT) said sales would miss forecasts for the third straight quarter and that the company would suffer its second consecutive loss. The worsening outlook is stoking Wall Street's impatience with Zander and causing a growing number of analysts to hypothesize that the CEO may be headed for the exits before long. "A number of key executives around Mr. Zander have changed," says Lawrence Harris, an analyst with Oppenheimer & Co. "By yearend, if we don't see significant improvements, we could see more changes."

The Buck Stops

The impetus for the latest round of bearishness was Motorola's announcement late on July 11 that second-quarter sales were $8.6 billion to $8.7 billion, down from an earlier forecast of $9.4 billion, and that continuing operations had a loss of 2¢ to 4¢ a share. Worse, the bread-and-butter cell-phone unit is no longer expected to be profitable in 2007—something Zander repeatedly encouraged Wall Street to expect this year. "Motorola's handset product line is in a bit of disarray right now," says Mark McKechnie, an analyst with American Technology Research. He added that the company's once-sizzling ultraslim handset, the Razr, "lost favor with consumers and carriers."

Zander too is losing favor with his core constituency: shareholders. Until recently, much of the blame for the ailing mobile-phone business was laid at the feet of Motorola's former cell phone czar, Ron Garriques, who was criticized for chasing market share at the expense of profitability. But in the absence of Garriques, who bolted for Dell (DELL) in February, the buck stops with Zander, investors say (see BusinessWeek.com, 3/22/07, "Motorola's Zander: On Razr's Edge"). While he has aggressively cut costs by shedding jobs, problems persist. "A lot of people are really tired of him blaming everyone else," says Michael Mahoney, managing director of EGM Capital. "Motorola has a problem, and he is running out of scapegoats."

No. 3 in Handsets?

Mahoney is not alone. Motorola shares rose almost 3% in the hours before the company's dour sales announcement amid speculation that Zander could be about to resign. The sentiment was stirred by an activist investor, Eric Jackson, who on July 9 published a statement online titled "Motorola Plan B"—an attempt to fuel a campaign to oust Zander. Jackson, CEO of consulting firm Jackson Leadership Systems, laments Motorola's performance vis-à-vis bigger rival Nokia (NOK) in the years since Zander took the helm. "We don't believe this past performance and the currently articulated strategy for a turnaround is sufficient or acceptable," Jackson wrote.

"This company has a leadership and a mobile product problem which needs to be corrected—not in 6 months from now, after it falls further behind its competitors."
Zander was not available for comment, but a Motorola spokeswoman says, "The current management team—Ed, COO Greg Brown, and CFO Tom Meredith—are working on restoring profitability for mobile devices and moving forward with a strategy to fix the business."

That fix is becoming increasingly urgent, as Motorola slips among handset vendor ranks. In the second quarter, Motorola likely lost its No. 2 position in global handset shipments to Samsung, expected to have shipped 38 million units to Motorola's 36 million, estimates Neil Mawston, associate director at consultancy Strategy Analytics. "If our Samsung forecast proves correct, this will be the first time ever that Motorola has lost its second position to Samsung," he says.
And market-share losses might be exacerbated now that Apple's (AAPL) iPhone is on the market. Many iPhone buyers appear to be ex-Razr users, says Ken Dulaney, an analyst with Gartner (IT). "If more consumers move to the iPhone, Motorola could be affected," says Harris at Oppenheimer.

Ill Will Growing

As fervently as some investors want change, Zander has shown staying power. In May, investors voted down a proposal that would have given Carl Icahn a seat on Motorola's board and dealt a big no-confidence vote to Zander (see BusinessWeek.com, 5/7/07, "Motorola Showdown: Icahn vs. Zander"). A signal that Zander is still very much in charge, at least for now, is the appointment of Stu Reed as the new head of the phone unit. Reed takes over for Ray Roman and Theresa Vega, who were named co-heads of the business after Garriques' departure. But sources close to Motorola say that Zander was never fully comfortable with Roman in charge. Reed, on the other hand, is a handpicked Zander guy, snatched from IBM (IBM) in April, 2005. There, Reed held executive roles in manufacturing strategy, process, and information technology for 20 years. He has headed up Motorola's supply chain, and is generally well regarded inside and outside Motorola. "I like seeing him come over," McKechnie says. "The hope is he will help Motorola control costs."

Sober cost management will indeed serve as a useful crutch, but it's Zander who has to demonstrate that he can stop the company's bleeding and turn it around—fast. Ever since the fast-talking former Sun Microsystems (SUNW) executive left the private equity world to take the reins at Motorola, his energy and impatience have been viewed as the right leadership medicine for a company formerly led by the contemplative and cautious Christopher Galvin, the founder's grandson. Contrarians grumbled that Zander's success was really based on strategy implemented by Galvin's team before the former CEO was ousted in 2003.

With each passing bad quarter the ill will is growing. Compared to the previous CEOs, "Zander's style is a little more abrasive, and a little less gentlemanly," Mahoney says. "You get a sense that he is more of a show horse vs. performance horse." With so many problems plaguing the company and changes under way to try and fix them, Motorola announced that it would push back its annual analyst meeting from July to September. By then, Zander will either be stepping on stage to show some tangible signs of recovery in mobile phones, or perhaps the stage will have been handed over to a new head horse.

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