Motorola: New No. 2, Same Game Plan

Can COO Zafirovski keep the restructuring on track?

On the morning of July 25, Edward D. Breen went to Motorola Inc. (MOT ) CEO Christopher B. Galvin with crushing news: Just six months into his hard-charging tenure as the company's chief operating officer, Breen was leaving to run troubled conglomerate Tyco International Ltd. Breen's departure stunned Galvin and the board of directors, who were "frankly very annoyed," says board member Nicholas Negroponte.

That didn't stop the board and management from acting decisively, however. Within hours of Breen's departure, Galvin tapped Mike S. Zafirovski, formerly chief of the company's cellular business, as Motorola's new COO. The appointment seemed to steady investors, who initially rushed for the exits, fearing that Motorola's ongoing restructuring would run off the rails without Breen. "Mike's a great leader," says Motorola board member Samuel C. Scott III. "He was an obvious candidate."

With the transition done, Motorola watchers were left wondering why Breen bolted. Now knee-deep in Tyco's beleaguered business, he didn't return phone calls to explain. But given his ambitions, it isn't hard to understand. Breen was frustrated, says a wireless executive, because he had to run to Galvin "every time he wanted to get something done." Besides, Breen clearly saw the Tyco CEO job as a challenge he couldn't pass up.

In fact, his departure shouldn't have surprised Galvin at all. He knew Breen wanted to be CEO. And with Galvin under heavy pressure to return the company to profitability, investors were calling for him to step down within two years. But thanks in large part to Breen's successful cost-cutting, Galvin is now less vulnerable. After all, Motorola reported operating income of $193 million in the second quarter, up from a loss of $264 million in the same period in 2001. It became clear to Breen that a more secure Galvin wasn't going anywhere anytime soon. "He's the king," says a senior executive close to Motorola. "And he's not going to be knocked off the throne."

With Galvin at the top, Motorola needs a solid No. 2. Zafirovski--known around Motorola as Mike Z--faces formidable hurdles as he takes over the day-to-day operations of the 100,000-employee, $30 billion company. The first order of business: turn a profit this year. Before Breen left, he promised earnings of 14 cents a share. Zafirovski will have to meet that target while halting a string of 14 straight one-time charges that mask operating performance. He also has to fix a $6.4 billion wireless infrastructure business amid a weak market. Spending on switching gear that zaps phone signals from user to user will likely edge up just 2.25% to $53.5 billion this year and drop 13% to $46.6 billion in '03, says researcher In-Stat/MDR. Finally, Zafirovski must make the chip unit profitable by mid-2003. "He'll have challenges because he hasn't run those other businesses," says Jane Zweig, CEO of wireless consultant Herschel Shosteck Associates Ltd.

Still, Mike Z has proved himself an adept manager. Since taking over Motorola's cell- phone division in June, 2000, the former General Electric Co. exec has almost managed to turn around the $10.5 billion business. In the second quarter, it made $172 million on sales of $2.6 billion and has increased its market share the past couple of years from under 13% to more than 18% today. When Motorola was considering the shuttering of a key type of phone technology, Zafirovski sensed it was in demand by customers and boosted output from zero to some 6 million this year. "He was able to turn our ship to meet customer needs," says cell-phone general manager Ron Garriques.

It will take Zafirovski a while to prove his merit as COO. But if he helps get Motorola humming by the middle of next year, Galvin could again be in the same predicament he faced with Breen. Success would make Zafirovski a hot commodity, and he, too, could prove eager to run his own show. Galvin gets credit for bringing talented managers to Motorola, but "he should be open to moving aside," says Walter J. Casey, tech analyst of Banc One Investment Advisors, which owns Motorola shares. Unless he's flexible, Galvin could find himself stunned once again.

By Roger O. Crockett in Chicago

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