Motorola CEO wins duel; fight now is to keep job

Motorola Inc. chief executive officer Ed Zander, who last week fought off billionaire activist Carl Icahn's attempt to force his way onto the board of directors, may find the next fight is for his job.

While Zander beat back Icahn, investors say they are increasingly upset that the CEO has failed to produce phones to vanquish competitors' products, such as the BlackBerry and sleek phones from Nokia Corp. and other companies.

"He's brought nothing to the party," said Joan Lappin, president of Gramercy Capital Management Corp., of New York, who sold the firm's stake in Motorola last year and has been telling investors ever since to avoid the stock. "I would doubt that he's going to be the CEO at the end of the year."

Zander, celebrated as recently as October for lifting sales and profit with Motorola's slim Razr phone, has quickly become a disappointment. When the results for all of 2006 were in, they showed that he presided over a decline in profit for the Schaumburg, Ill., company, the world's second-largest mobile-phone-maker. Its net income fell 20 percent to $3.7 billion.

The reason: The profit margins that had won him fame evaporated amid price-cutting to fight Nokia. Also, Apple Inc.'s iPhone and consumer models of the BlackBerry pose challenges analysts say Motorola has not yet met.

Motorola's "connected home solutions" unit, which employs about 1,100 people in Horsham is one of the company's bright spots, with its sales growing 42 percent in the first quarter of this year.

But as a result of Motorola's decline in profit last year, its shares have lost 30 percent of their value since they reached a six-year peak of $26.20 on Oct. 13. They closed yesterday at $18.60, near their lowest in about two years.

"He's obviously failed so far," Matthew Kelmon, a fund manager at Kelmoore Investment Co. Inc., of San Francisco, said of Zander. "The leash is one more quarter. If things don't look like they're turning around, the board will be forced to take action."

Zander, 60, this week took a step to try to win over investors and consumers. On Tuesday, the company staged an elaborate news conference in New York to introduce phones allowing users to listen to music, shoot pictures, play video, and browse the Web at faster speeds. It is a trend Motorola missed in recent quarters, letting competitors steal sales.

"It's painful," Zander said at the annual shareholders' meeting May 7.

While Motorola is adding features with this week's introduction, so are competitors. They are targeting a U.S. market for phones with e-mail, music and video that will jump 43 percent this year to almost $6 billion, according to estimates by researcher Strategy Analytics Inc., of Boston.

Motorola's board "stands fully" behind Zander, director Sam Scott said at the meeting, where shareholders defeated Icahn's effort to gain a board seat.

Zander was hired at Motorola in 2004 to revive the company that had invented the wireless phone, but then lost its dominance to Nokia, of Espoo, Finland, now the market leader.

That year, Motorola introduced the Razr, a $499 handset that won cachet with consumers for its slim design.

At double the price of many Nokia phones, the Razr almost tripled handset profit margins to more than 11 percent of sales by mid-2006 from three years earlier.

The phone sold more than 75 million units - and Motorola's share of the cell phone market jumped one-third to a peak of 21.9 percent in last year's second quarter.

But while Zander pressed new versions of the Razr, Nokia and Samsung Electronics Co. Ltd., of Suwon, South Korea, introduced phones with video, photo and music-playing features.

Zander was forced to cut prices on the Razr, driving down the average selling price on Motorola phones 20 percent. The Razr can now be bought for as little as $29.99.

After posting the profit drop for 2006, Zander in the first quarter of this year stopped cutting prices to try to preserve profit margins. The strategy backfired as Motorola lost sales - partly because its phones were not competitive in their features, according to Strategy Analytics.

The company lost $181 million for the January-to-March period, its first quarterly loss in almost five years.

Icahn, Motorola's sixth-largest shareholder with 2.9 percent of the stock, said Zander had until the end of the year to show results.

"Look how Motorola stumbled. I blame it on the board, and I blame it on Ed," Icahn said in an interview last week. "I'd love to see him perform. Can he do it? That's the question."