Motorola Chief, Struggling to Top Razr, Loses Support (Update3)

May 14 (Bloomberg) -- Motorola Inc. Chief Executive Officer Ed Zander, who fought off billionaire activist Carl Icahn's attempt to force his way onto the board of directors last week, may find the next fight is for his job.

While he beat back Icahn, investors say they are increasingly upset Zander has failed to produce phones to vanquish foes that are just as worrisome: The BlackBerry and a host of other sleek competitors from rivals such as Nokia Oyj.

``He's brought nothing to the party,'' said Joan Lappin, president of Gramercy Capital Management in New York, who sold the firm's stake in Motorola last year and has been telling investors to avoid the stock ever since. ``I would doubt that he's going to be the CEO at the end of the year.''

Zander, celebrated as recently as October for lifting sales and profits with the slim Razr phone, has quickly become a disappointment. He presided over the first operating loss since 2002 at the world's second-largest mobile-phone maker, as profit margins that won him fame evaporated amid price-cutting to fight Nokia. Apple Inc.'s iPhone and consumer models of the BlackBerry pose challenges analysts say Motorola can't yet meet.

Shares of Schaumburg, Illinois-based Motorola reached a six- year peak Oct. 13 and have since lost 31 percent of their value. They fell 16 cents to $18.16 at 4:01 p.m. on the New York Stock Exchange, and are near their lowest levels in almost two years.

Nokia shares rose 3.9 percent in Helsinki today after the company raised its forecast for second-quarter market share, predicting a gain from the first quarter's 36 percent.

`Failed So Far'

Four analysts suggest investors sell Motorola stock. Some shareholders who own it say the stock probably won't recover while Zander is in charge.

``He's obviously failed so far,'' said Matthew Kelmon, a fund manager at Kelmoore Investment Co. in San Francisco with more than 110,000 Motorola shares. ``The leash is one more quarter. If things don't look like they're turning around, the board will be forced to take action.''

Zander, 60, has a chance to win over investors tomorrow, when Motorola shows new phones that allow users to listen to music, shoot pictures, play video and browse the Web at faster speeds. It's a trend Motorola missed in recent quarters, allowing competitors to steal sales.

``It's painful,'' Zander said at the annual meeting May 7. Motorola's new phones have ``unbelievable video capabilities,'' he told reporters in Santa Clara, California, two days later.

Motorola's board ``stands fully'' behind Zander, director Sam Scott said at the annual meeting, where shareholders defeated Icahn's effort to gain a board seat. Zander and Motorola won't comment beyond Scott's statement, spokeswoman Jennifer Weyrauch- Erickson said. Separately, Motorola today said it gave Zander the right to purchase 800,000 shares at $17.70 each if the stock meets performance goals.

Razr's Ride

Zander, a Brooklyn, New York-born engineer and former chief operating officer at Sun Microsystems Inc., was brought on at the start of 2004 to revive the company that invented the wireless phone, then lost its dominant market share to Espoo, Finland- based Nokia.

That year, Motorola introduced the Razr, a $499 handset that won cachet with consumers for its slim design.

At double the price of many Nokia phones, the Razr almost tripled handset profit margins to more than 11 percent of sales by mid-2006 from three years earlier. The phone sold more than 75 million units. Motorola's market share jumped by one-third to a peak of 21.9 percent in last year's second quarter.

It wasn't to last. While Zander pressed new versions of the Razr such as Slvr and Pebl, Nokia and Suwon, South Korea-based Samsung Electronics Co. introduced phones with video, photo and music-playing features. Zander was forced to cut prices on the Razr, driving down the average selling price on Motorola phones by 20 percent. The Razr can now be bought for as little as $29.99 with a call plan.

Big Loss

In the first quarter, Zander stopped cutting prices to preserve profit margins. The strategy backfired as Motorola lost sales -- partly because its phones weren't competitive, according to Boston-based researcher Strategy Analytics. The company lost $181 million in its first operating loss in almost five years.

Nokia's global market share climbed half a percentage point to 36.2 percent while Motorola's fell to 18 percent, the widest gap in three years. Samsung increased its share to 13.8 percent from 10.8 percent, according to Strategy Analytics.

``Razrs and more Razrs wasn't quite the answer,'' said John Krause, an analyst at Thrivent Financial for Lutherans in Minneapolis, which manages $65 billion including Motorola shares. ``It's somewhat disappointing that Motorola didn't have the foresight.''

`Gold Mine'

Zander shouldn't even get credit for the Razr, said Lappin, who warned of declining margins and prices at Motorola in a November Forbes.com article after she sold her shares.

Motorola started developing the Razr under Zander's predecessor, Christopher Galvin, a grandson of Motorola's founder who also cut jobs to reduce costs, leaving Zander in a position to boost profit.

``Zander walked into a gold mine,'' Lappin said. ``He reaped the benefits and fooled everybody.''

Icahn, Motorola's sixth-largest shareholder with 2.9 percent of the stock, said Zander has until the end of the year to show results.

``Look how Motorola stumbled. I blame it on the board and I blame it on Ed,'' Icahn said in an interview last week. ``I'd love to see him perform. Can he do it? That's the question.''

New Products

While Motorola is adding features, so are competitors targeting a U.S. market for phones with e-mail, music and video that will jump 43 percent this year to almost $6 billion, Strategy Analytics estimates.

Research In Motion Ltd., with a 45 percent market share for e-mail phones, began selling the BlackBerry Curve this month, adding a camera, media player and music. Cupertino, California- based Apple starts selling the iPhone in June and aims to ship 10 million units next year. Motorola's Q, introduced last June, has garnered 12 percent, behind Sunnyvale, California-based Palm Inc., said Framingham, Massachusetts-based researcher IDC.

``The success of Motorola is not pegged to the success of Ed Zander personally,'' said Inder Singh, a Prudential Equity Group analyst in New York with a ``neutral weight'' rating for Motorola. ``Shareholders want somebody to come up with a new product cycle to help this ailing company.''

To contact the reporter on this story: Ville Heiskanen in Chicago at vheiskanen@bloomberg.net

To contact the editor responsible for this story: Cesca Antonelli at fantonelli@bloomberg.net