Motorola needs radical plan as CEO resigns - Analysis

Rethink IT, Nov, 2003

Motorola's chief executive Christopher Galvin resigned last month, a move that, while its timing was a shock, can hardly have been unforeseen. Motorola's last couple of years have been miserable--falling out of the semiconductor top 10 for the first time, losing handset marker lead to Nokia, adopting an indecisive and probably disastrous strategy in smartphones. A company with such a string of mistakes and failures is sure to look for new leadership, though his successor will face a huge challenge to rejuvenate the once mighty communications major.

Wall Street backed the need for a change at the helm, with shares rising 9.5% on the announcement that Galvin would leave as soon as a replacement is appointed. This surge was intensified by Motorola's confirmation of its third quarter guidance, cutting short fears that the news might he linked to upcoming poor results. It also reflects the US market's confidence that Motorola can recover, and its natural tendency to favor Motorola stock.

Galvin, the grandson of Motorola's co-founder, has been CEO since 1997 and president since 1993, and joined the company in 1967. (Motorola was founded by his grandfather, Paul Galvin and great-uncle Joseph Galvin, in 1928, and his father, Robert Galvin, succeeded as CEO and oversaw the invention of the commercial cellphone). In a prepared statement, the last of the dynasty said: "While I have achieved substantial results, the board and I do not share the same view of the company's pace, strategy and progress at this stage of the turnaround. Accordingly, it is time for me to pass the baton co new leadership."

MISSING THE BOAT

Galvin's tenure has been a story of missed opportunities and poor decisions that have finally lost him the confidence of the board. Not only has the company lost once huge market share in cellphones and semiconductors, but it has missed several boats that might have sailed it to recovery, a notable recent example being cameraphones, the biggest driver of the mobile market this year.

This year Motorola's zigzagging smartphone strategy has reflected the general indecisiveness of the corporate strategy, which Galvin opponents said was echoed in the man's personal style--uncharismatic and hesitant, yet unwilling to involve key deputies in decision making leading to poor decisions and ones not backed by the inner circle. This factor was said to have driven president Edward Breen to leave in 2002, a move that, in contrast with Galvin's resignation, sent Motorola's shares spiralling downwards, and appeared to spark a decline in business fortunes.

WHO WILL TAKE THE HELM?

The most likely successor seems to be the current chief operating officer, Mike Zafirovski, although the company says it will look at external candidates too. Those tipped include Verizon president Lawrence Babbio, Nextel president Tim Donahue an Kevin Sharer CEO of biotech company Amgen. Many analysts favored Indra Nooyi, a former Motorola executive and current board member, and currently CFC at PepsiCo, but she is said not to be interested in the move.

Motorola lost its number one spot in cellphones to Nokia in the mid-1990s and is now also likely to lose leadership over the Finnish company in its native US stronghold, In terms of revenue, it has also been eclipsed in handsets by Samsung and has shown no signs of a strategy to recover its position. While Nokia and Samsung make increasing capital out of their membership of Symbian, Motorola has backed away from that operating system in favor of a halfhearted commitment to Linux and a potentially damaging tie-in with Microsoft. It only introduced a cameraphone last month, missing out on a market of 26m units since the start of 2002, a market that has chiefly benefited Nokia, which controls 42%.

A new CEO may also spin off certain divisions, and only two weeks after the Galvin announcement, Motorola had announced a plan to separate and IPO its Semiconductor Products Sector (SPS). Wall Street has been pushing Motorola to dump this unit, which focuses on systems-un-chip devices, for years, but Galvin opposed this, on the basis that, though lossmaking, the division contained the company's most advanced intellectual property.

The semiconductor division will be a separately traded company and Motorola is planning an IPO, with the remaining shares going to its shareholders in a tax free distribution.

The company says the move will give it greater focus on its key areas and will enable the semiconductor business to target customers among rival firms, such as other handset makers, more aggressively, as well as freeing it to make acquisitions. About one-quarter of the unit's sales are to its handset sister company, and many feel a spin-off will make it less of a slave to the cellphone company's agenda and freer to innovate in growing areas such as voice over Wi-Fi or WiMAX.

Motorola also hopes the separation of the highly cyclical chip business will give a better and clearer valuation to the rest of the company.

The chip unit is Motorola's second largest division after cellphones and reported $4.8bn in sales last year, about 18% of the company's total.