Motorola's Zander: On Razr's Edge

A third-straight quarter of missed financial targets steps up pressure on the man at the helm of the world's No. 2 handset maker

In January, when Motorola Chief Executive Ed Zander reported figures that missed analysts' estimates, he lamented how matters "can get away from you." Less than two months later, they've slipped even further. Amid sinking performance of his flagship mobile-phone business, Zander on Mar. 21 ratcheted down financial targets for the first quarter and the full year, and announced a dramatic reorganization of top management.

The phone unit is under so much pressure that Motorola (MOT) now expects first-quarter sales to be in the range of $9.2 billion to $9.3 billion, down more than $1 billion from its January forecast of $10.4 billion to $10.6 billion. And the company anticipates a loss in the range of 7¢ to 9¢ a share, rather than the 17¢ profit analysts were expecting. The first quarter "will be difficult and disappointing, and I also anticipate Q2 will be difficult," Zander said in a conference call with Wall Street analysts. Investors pushed the stock down nearly 5%, to $17.85, in after-hours trading.

Missing in Action

To help stop the bleeding, Zander promoted his most trusted lieutenant, Greg Brown, to president and chief operating officer. Brown joined Motorola, where he led the Networks & Enterprise division, in 2003. His lofty credentials—he's the former head of network-management software company Micromuse and has held several top positions at telecom titans including Ameritech and AT&T (T)—long made Brown a candidate for the No. 2 post. Zander told BusinessWeek in an interview that the move had not been made earlier because Brown had his hands full integrating recent acquisitions Good Technology and Symbol Technologies.

With financials mired, Zander also announced that Thomas Meredith, 56, will step in as acting chief financial officer as of Apr. 1 as David Devonshire, 61, retires. It's not clear whether Devonshire made any gaffes, but he was never a favorite among Wall Street analysts. Meredith, a Motorola board member, is a general partner of the investment management firm Meritage Capital and chief executive of MFI Capital. He is expected to help Motorola focus on driving profitability and to pull the phone unit out of the red.

Despite the high-level management infusion, it's Zander's job that could be on the line. When the Motorola board picked him to take over for the company founder's grandson, Chris Galvin, in 2004, Zander sent a jolt through the company with his enthusiasm, no-nonsense focus, and sense of urgency. But as the company prospered, largely on the soaring success of the Razr, Zander pulled back. He left much of the phone division's strategy in the hands of Ron Garriques, a hard-driving young executive who headed the unit.

Losing Patience

Garriques focused the team on building cell-phone market share and did so well that many expected Motorola to usurp Nokia (NOK) in global share by this year. The strategy backfired as the company failed to follow the Razr with equally successful phones. Although volumes rose, operating margins deteriorated. Zander and Garriques feuded over strategy, sources say, and Garriques bolted for Dell (DELL) last month. "We can't chase market share for market share's sake," Zander told BusinessWeek. "It's like a bad habit that we have to break."

Over the last couple of months, Zander has spent most of his time in Libertyville, Ill., home to the cell-phone unit. And he's visited several carriers, including Verizon (VZ), Sprint Nextel (S), and AT&T's Cingular, in a bid to get his mobile-phone business on the same page as Motorola's biggest customers. While on the ground, one thing has become clear: Things are worse than he thought. Innovation has slowed. Execution is poor. In January, when Motorola announced a lackluster fourth-quarter performance and cost cuts in a meeting with analysts, "we thought we had things under control," he says. Since then, "It occurred to us that things were not moving fast enough."

Zander promised investors on Mar. 21 that the mobile-phone business would improve by the second half of the year and return to profitability for the full year. There's no question the board of directors is watching closely. While sources say Zander has the support of the board for the moment, there are those whose patience is wearing thin. "I hear lots of complaints [about his failure to make big lasting changes]," says one banker. "He's been there three years now: A good CEO changes the culture in that much time."

Deal Possibilities

The push for change is coming at Zander from all angles. Investor Carl Icahn has been agitating for Motorola to use a substantial amount of its $11-plus billion in cash for stock buybacks (see, 2/12/07, "All This and Icahn Too"). And amid all of the disappointing earnings news and management shuffling, Motorola also announced Tuesday that it has accelerated its repurchase of $2 billion of common stock and increased its existing share repurchase program to $7.5 billion. That may not be enough to get Icahn off Zander's back.

Even if it does, the CEO has much more to worry about. As Motorola struggles, private equity players are circling. Sources on Wall Street say a deal is not out of the question. Motorola's woes and collection of vast assets make it a perfect candidate for any one of the big private equity firms. One banker says a deal could even happen in the mid-20s-per-share range, just above where Motorola is trading now, "and you could still get a good return."

Motorola is not commenting on any deal possibilities. And Zander says he will reveal more detail about how he plans to better execute in the cell-phone operation on Apr. 18, when Motorola announces first-quarter earnings. He'll need to be convincing. Right now, "they have not really addressed how they are really going to fix and turn around the mobile-phone biz," says Albert Lin of American Technology Research. "It's not enough for most shareholders."

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