Motorola Sets Its Phone Unit Free

The spin-off could breathe new life into the business, especially if a top-notch executive takes the reins

Motorola's (MOT) mobile-phone business has turned from dynamo to disaster in just a few short years. With no hot products to follow its popular Razr, the onetime industry leader has rapidly lost market share and sales. The situation has grown so rocky that CEO Gregory Q. Brown has struggled to find a qualified executive to run the business—or any viable bid to acquire it.

But Motorola's move on Mar. 26 to spin off the mobile-phone unit could change the division's fortunes. The Schaumburg (Ill.) company plans to set up the business as a separately traded public entity, and the board has retained executive search firm Russell Reynolds Associates to recruit a new CEO for the company. Brown is now likely to find it much easier to attract a top-flight candidate, since the new chief will have a free hand. "That changes the dynamics of the search," says Peter D. Crist, head of executive recruiter Crist Associates in suburban Chicago. "Top execs at key players such as Nokia and other rivals would not have been interested [if the phone unit were not separate]. Suddenly they perk up and say: 'I can run that business.'"

Any Upside Is a Win

What looked like "a poisoned chalice," as one analyst called the phone unit, has suddenly become a golden fount of opportunity. As a part of Motorola, the phone business was slowed by a bureaucratic corporate culture. Even though the mobile-phone business makes up half of the company's sales, its executives have not always been able to operate independently. Their investment, supplier, and operational decisions have been intertwined with those of Motorola's other divisions. "This looks a lot less unattractive than the encumbered, politically mired entity that existed at midnight on Mar. 25," says Yankee Group telecom analyst John Jackson.

Expectations are also at rock bottom. American Technology Research is forecasting that revenues at the phone division will slide to $16 billion in 2008, down from $19 billion last year. So almost any improvement in the unit's financial performance will be seen as a sign of success.

Sources close to the search say Brown has been actively considering candidates in recent weeks, and he has set the bar high. Managing a global phone manufacturer is no easy task, especially with the rocky economic outlook and Carl Icahn battling Motorola for board seats. The business struggled under the previous two CEOs, Christopher B. Galvin and Edward J. Zander, who handed over the reins to Brown in January. "We want someone who is a proven leader with a results orientation," Brown told BusinessWeek. Someone "who preferably has technology awareness and a consumer-electronics or customer background in the wireless space."

Motorola would not comment on specific names. But recruiters and analysts say executives in the top two or three posts at Motorola rivals or its chief customers make likely candidates. Among Motorola's customers, Verizon (VZ) COO Denny Strigl and former Sprint Nextel (S) CEO Gary Forsee are considered possibilities. A Verizon spokesman says Strigl is not a candidate for the Motorola job; a spokesman at the University of Missouri, where Forsee is president, says he remains committed to his role there.

Dream Candidate

One possibility among Motorola rivals is Nortel Networks (NT) CEO Mike S. Zafirovski, a former top executive at Motorola and General Electric (GE). Known as Mike Z, he became chief of Nortel after successfully running Motorola's phone business and being promoted to chief operating officer. At Motorola he was considered a turnaround specialist for improving margins in the cell-phone business and speeding up product delivery. He left after losing out to Zander in the competition to replace Galvin in 2004.

Zafirovski could not be reached for comment. A Nortel spokesman said he remains "100% dedicated to Nortel's transformation." Another possibility is Anssi Vanjoki, executive vice-president for new markets at Nokia. Vanjoki is highly respected in the industry as an authority on brand and customer markets—precisely the areas where Motorola is weak. "The one person on the planet who would be the perfect candidate is Vanjoki," says Robert J. Laikin, CEO of Brightpoint (CELL), a major distributor of Motorola and Nokia phones. "But he'd never do it because he'd be considered a traitor in Finland." Vanjoki could not be reached for comment.

Motorola is no stranger to spin-offs. It cut its semiconductor unit loose in 2004 under conditions similar to those of the phone unit now. The new company, Freescale Semiconductor, was considered an underperformer with poor prospects. But Freescale was able to recruit a strong CEO in veteran IBM executive Michel Mayer. Mayer improved the business, and the shares quickly doubled from their initial 13.

Freescale was eventually sold to a group of private equity investors and has fallen on hard times amid the economic downturn. But Brown says the handset business may have similar potential to surprise skeptics—if it attracts the right chief executive. "I think it's a fantastic opportunity to restore and revitalize a proud franchise," says Brown.

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