Zander May Be Running Out of Minutes

As profits vanish, is Motorola preparing to kick its CEO upstairs?

The board of directors at troubled Motorola Inc. has begun exploring options for the succession of embattled Chief Executive Edward J. Zander, BusinessWeek has learned. The board met with at least one outside executive, former MCI chief Michael D. Capellas, to discuss leadership roles at the company, including the possibility of his stepping into the CEO's shoes at some time in the future, though nothing came of it. Another possibility is that the board could eventually elevate current Chief Operating Officer Greg Brown.

That means that when the directors gather for their next meeting, expected to take place later this month, they'll have major issues to take on. The company had scheduled its annual analyst meeting for July 23 but then postponed it until September—leading to speculation from analysts that the board might be looking for a new CEO. According to two sources with knowledge of the board's actions, Zander and two directors met with Capellas to discuss options for joining the company. Capellas has since agreed to take the top post at First Data Corp. (FDC) when private equity firm Kohlberg Kravis Roberts & Co.'s acquisition of the company takes effect later this year. Motorola (MOT) and Capellas declined to comment.

Mounting Pressures

While Zander's job may be secure for the moment, he and the board are under intense pressure to set Motorola on a new course. The Schaumburg (Ill.) tech giant had always held the No. 1 or No. 2 spot among the world's mobile-phone handset makers, but Samsung Corp., which had been No. 3, overtook Motorola in market share during the second quarter, according to Cowen & Co. Even more troublesome, on July 11, Motorola warned 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. A comparison with the company's performance a year earlier is stark: In the first half of last year, the handset business earned $1.5 billion in operating profit. This year, analysts now expect the unit to suffer a $519 million loss. The company was to announce its second-quarter results on July 19.

Motorola's fortunes have soared and then sunk since Zander's arrival. At first, lifted by sizzling sales of its ultrathin Razr handset, the company did well. But the boom times didn't last. Motorola has now missed analysts' forecasts four quarters in a row. Some investors say Zander has already run out of time and are calling for his removal. "If I were on the board, I would put him in a cubicle and pay him his [salary] and make him sit there," rails Joan E. Lappin, chairman of Gramercy Capital Management Corp., a Motorola investor who has long been at odds with Zander and the board.

The Internal Candidate

At Motorola's next board meeting, it's likely that COO Brown will be named to the board, says one source who has spoken recently to a board member. One scenario, says this source, is for Brown to eventually succeed Zander. Brown came to Motorola in 2003 from Micromuse Inc. (IBM), a network management software company, where he was chief executive. He ran several businesses at Motorola before being promoted to COO earlier this year. This source speculates that Brown could take the chief's chair as soon as the end of this year, while Zander would move into the role of chairman. Board members could not be reached for comment.

Some analysts knock Brown because he hasn't had much experience with the company's bread-and-butter handset business. With that unit in so much trouble, they doubt he's equipped to handle a turnaround.

That's why some believe the best option is for Zander to remain in control. Zander focused the company on leading-edge designs and improved relations with customers. Analyst Ehud Gelblum of JPMorgan Chase & Co. (JPM) says of Zander: "I think he is talented and has as good a chance as anyone to turn around the company. Management change would just add more turmoil."

Time for a Breakup?

One option that the board once had—selling out to a private equity firm—is now probably off the table. That's because the big hit to Motorola's handset profits means it wouldn't have sufficient cash flow to cover debt interest payments resulting from a leveraged buyout. "Before, the math worked. Now it doesn't work," says a partner in a private equity firm that had been eyeing Motorola prior to its earnings warning.

So, for now, it's on the current management team to turn things around. With revenues slipping, Zander and Brown are faced with taking a chain saw to the company's cost structure. They have already announced 3,500 job cuts in 2007 and a further 4,000 to come in 2008. The cuts will likely go even deeper if handset revenues continue to crater.

Another alternative is for Motorola to sell pieces of its business. JPMorgan's Gelblum says a little-known business that makes chips for computers is already on the block, and some of the larger businesses could be sold off as well. The networks unit, which sells gear to telecommunications outfits, lags far behind giants such as Ericsson (ERIC), Nokia (NOK), and Alcatel-Lucent (ALU). Investors and analysts have long begged for Motorola to sell it. Gelblum estimates that the networks unit could reap $8.2 billion in a sale.

No CEO likes to break up his company, but Zander may not have much choice unless he fixes the handset business quickly. Shareholders in May turned back a bid by activist investor Carl Icahn to take a seat on the board, but Icahn is waiting in the wings. If Zander doesn't make good things happen soon, his nemesis will be back—with a vengeance.