Motorola's Zander: 'Out of scapegoats'

Roger O. Crockett and Olga Kharif
16 Jul 2007

In mid-May, Motorola's beleaguered CEO Ed Zander was starting to feel optimistic. Zander had just unveiled a new phone lineup and for the first time in months, headlines would focus on something other than missed financial targets (see, 5/16/07, 'Motorola's Gamble: Substance over Style'). 'I think we're seeing the transformation beginning,' he told BusinessWeek in an interview after the event.

Any change for the better was woefully short-lived. Two months on, Motorola (MOT) said sales would miss forecasts for the third straight quarter and that the company would suffer its second consecutive loss. The worsening outlook is stoking Wall Street's impatience with Zander and causing a growing number of analysts to hypothesize that the CEO may be headed for the exits before long. 'A number of key executives around Mr. Zander have changed,' says Lawrence Harris, an analyst with Oppenheimer & Co. 'By yearend, if we don't see significant improvements, we could see more changes.'

The Buck Stops

The impetus for the latest round of bearishness was Motorola's announcement late on July 11 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. Worse, the bread-and-butter cell-phone unit is no longer expected to be profitable in 2007"”something Zander repeatedly encouraged Wall Street to expect this year. 'Motorola's handset product line is in a bit of disarray right now,' says Mark McKechnie, an analyst with American Technology Research. He added that the company's once-sizzling ultraslim handset, the Razr, 'lost favor with consumers and carriers.'

Zander too is losing favor with his core constituency: shareholders. Until recently, much of the blame for the ailing mobile-phone business was laid at the feet of Motorola's former cell phone czar, Ron Garriques, who was criticized for chasing market share at the expense of profitability. But in the absence of Garriques, who bolted for Dell (DELL) in February, the buck stops with Zander, investors say (see, 3/22/07, 'Motorola's Zander: On Razr's Edge'). While he has aggressively cut costs by shedding jobs, problems persist. 'A lot of people are really tired of him blaming everyone else,' says Michael Mahoney, managing director of EGM Capital. 'Motorola has a problem, and he is running out of scapegoats.'

No. 3 in Handsets‾

Mahoney is not alone. Motorola shares rose almost 3% in the hours before the company's dour sales announcement amid speculation that Zander could be about to resign. The sentiment was stirred by an activist investor, Eric Jackson, who on July 9 published a statement online titled 'Motorola Plan B'"”an attempt to fuel a campaign to oust Zander. Jackson, CEO of consulting firm Jackson Leadership Systems, laments Motorola's performance vis-ÃÂ -vis bigger rival Nokia (NOK) in the years since Zander took the helm. 'We don't believe this past performance and the currently articulated strategy for a turnaround is sufficient or acceptable,' Jackson wrote.

'This company has a leadership and a mobile product problem which needs to be corrected"”not in 6 months from now, after it falls further behind its competitors.'

Zander was not available for comment, but a Motorola spokeswoman says, 'The current management team"”Ed, COO Greg Brown, and CFO Tom Meredith"”are working on restoring profitability for mobile devices and moving forward with a strategy to fix the business.'

That fix is becoming increasingly urgent, as Motorola slips among handset vendor ranks.

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