Motorola: Plan B

There is little to get excited about with Motorola these days. '''Since Ed Zander took over as the Chairman and CEO in early January 2004 through today, Motorola has returned 13.5% to its shareholders. Nokia, the #1 mobile handset maker in the world, has returned 37.8% over the time period. The S&P 500 has returned 35.2%. Your returns as a shareholder would have been 3x if you had put your money in Nokia or an index fund the day Ed Zander started.''' We don't believe this past performance and the currently articulated strategy for a turnaround is sufficient or acceptable. 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.

Price/Earnings (P/E) Ratio is another way to measure the market's expectations for Motorola's growth prospects. While Cisco – a competitor in the Networks and Connected Home businesses – enjoys a 25x P/E ratio, and Nokia – the current leader in Mobile Devices – has a 21x P/E ratio, Motorola sits with a current P/E of 16x. This is less than half of Motorola's P/E at the beginning of 2004 which was 38 ($14.50 per share with EPS of 38 cents for the preceding 12 months). The flip-side of this low P/E is that there is tremendous potential for unlocking value, if Motorola can succeed in getting greater growth from all 3 of its divisions but especially in the Mobile Devices Business (MDB).

As a shareholder, you could (a) sell your shares, (b) stay status quo with the current Motorola board and team and wait 6 months to see whether the promised turnaround appears, or (c) you can join our group now to propose a "Plan B" to Motorola and have them take action on it immediately.

After the May annual meeting, at which several shareholders expressed their disappointment and asked for change, Motorola and Mr. Zander promised exciting new handset models in the coming weeks which would play a key role in the turnaround for Motorola's MBD and, thus, Motorola itself in the remainder of the calendar year. These models have now been released – to a tepid response from customers and Wall Street.

We believe that the time is now for the board to undertake aggressive changes at Motorola.

Instead of only presenting the problems, our investor group wants to be part of the solution which will deliver extraordinary value to Motorola shareholders and make it a better company for its employees and customers. We present the following "Plan B" to put Motorola on a path back to its rightful place as the worldwide leader in communications.

Supporters are welcome to provide their comments/edits on this wiki. Once we receive final comments and suggestions over the coming weeks, we will finalize the plan and submit it to the Motorola board for action.)

Replace Ed Zander as Chairman and CEO immediately
This January will mark the 4 year anniversary of Mr. Zander's hiring. Nokia and the S&P 500 have exceeded Motorola's shareholder returns by 3 times over that time period. Many suspect that Motorola will drop from the #2 to the #3 position in worldwide handset sales this year. The results from the past three quarters have been under-whelming, as the company sank to negative margins. The Q2 numbers were also extremely weak compared with the previous year.

There is no obvious answer to the question: What has been Ed Zander's mark on Motorola? He came with a Silicon Valley background, but how has that experience or those past ties translated into tangible results for the Schaumburg, IL-based Motorola? He tackled the low hanging fruit that was obvious to everyone, such as selling the automotive electronics unit. But, what has he brought to Motorola that is really unique in the last 3½ years? If it's difficult to answer that question, we find it hard to imagine what he'll bring moving forward, which is why we suggest a change is needed now.

You can agree or disagree with Terry Semel's vision for Yahoo!, but he had a vision. There is no discernible vision or articulated strategy for Motorola by Mr. Zander. At the May 31st, 2007, Lehman Brothers Worldwide Wireless & Wireline Conference, Mr. Zander stated: "We have a strategy: Seamless Mobility." This concept is repeated often on the corporate website and in recent letters to shareholders. What does it mean? How does it suggest Motorola will better compete with its rivals in its Mobile, Networks, and Connected Home divisions? If shareholders cannot figure this out, can Motorola's employees? A concept is not a strategy.

Mr. Zander arrived at Motorola in January 2004 and was blessed with the good fortune of the success of RAZR developed under direction of the previous CEO, Chris Galvin. He did well at marketing this hit product and taking credit for its success, but he did not address the underlying issues at the company around software platforms in MDB and significant scale issues in Networks and Connected Homes. Only when troubles became obvious to all at the end of RAZR's run did he begin to rationalize costs and accelerate plans for a next-generation of phones. This should have been done after the initial release of the RAZR to prepare for the next generation phone in the GSM space where Motorola makes most of its profits. Instead, a huge focus and amount of resources were poured into the development of the MotoQ smartphone since it was thought that this would be the next generation phone consumers would want. The smartphone idea might have been correct, but the execution was poor and the initial CDMA target market was small and the phone flopped. The subsequent GSM offering of the MotoQ came far late behind other smartphones with equivalent technology such as the Blackjack from Samsung. This is just one example of how the company under Zander has made strategic mistakes and failed to understand what their market would want in the future and target their largest population of potential consumers. In the mobile devices space, this is clearly the GSM market with over 90% of the users worldwide using a GSM phone. Motorola is clearly hampered by its America-centric view of the mobile devices consumer and market. The action is no longer in America, but how many senior leaders have the global experience to understand and act on these changing trends? Now, the focus is on turnaround. This requires a leader with a strong operational background, as HP found in Mark Hurd in replacing Carly Fiorina.

We are also deeply concerned with the reports which surfaced in an April Wall Street Journal article that Mr. Zander allegedly said: "I love my job. I hate my customers" in response to a question about why Motorola's carrier customers were discounting the prices of Motorola's phones. He later apparently suggested that, one day, he was going to use that line as the title for his memoirs. Motorola tried to defuse this story leading up to the May 7th annual meeting, by stating the company and Mr. Zander care about their customers. Everyone makes mistakes, but, in our opinion, this episode suggests arrogance or at least poor judgment that (1) Mr. Zander would actually say this and (2) he would be contemplating possible titles for his memoirs. According to research done by Dartmouth Tuck Professor Sydney Finkelstein (who is also a colleague), corporate and CEO arrogance is a critical reason "why smart executives fail". We believe that, although not the sole reason, this poor judgment or arrogance, combined with failing to articulate a strategy, failing to prepare the organization for the end of the RAZR wave, and – most importantly – the under-performance of the stock compared to its rivals are the main reasons why Motorola shareholders would benefit from new leadership at the top.

Given that replacing Ed Zander as soon as possible is likely in the best interest of the company and its shareholders. The board and Mr. Zander must take a very realistic approach and say to themselves that the status quo is not working for the short and as well as the long-term profitability of the company. This status quo must be challenged by allowing innovation to take place versus the confusion and fear that has been infused into the culture of the company due to restructuring and layoffs to reduce costs along with the lack of a solid vision. This culture of fear has caused the company to literally avoid taking risks that might lead to new innovations which is drastic mistake. As Haytham Samarchi, a senior engineering manager at Intel recently said, "Risk-taking is part of our culture, you make calculated risks and hope to leapfrog the competition. If you don't take risks, you are not going to go anywhere." Motorola needs to get back to a place where they, like Intel, can get back to a culture where innovation can thrive through calculated risks to further the company's position in the industry.

Motorola has a track record of falling and bouncing back, but never in its history has the company moved so rapidly towards disaster after such recent successes. At a time when much of the communications sector is beginning to bounce back, Motorola is left with announcing quarterly loss after quarterly loss which has driven the stock from a strong $25 down to $17.50 in less than a year which accounts for a 32% decrease. Recent months have shown that Zander does not have a suitable short-term strategy to turn the business around. Additionally, he also has no clear long term strategy to integrate and create synergies between the Mobile Devices business, Cellular Networks, Enterprise Mobility, Public Safety, Connected Home Solutions and the other recently acquired companies to fulfill the vision of "Seamless Mobility."

One can agree that "Seamless Mobility" is not a strategy but it is the "Vision" of the company. What Zander has failed to do is create a business strategy around this vision. Instead, his strategies have been focused too much on the Mobile Devices business while giving little attention to growing the other major business units within the company. Clearly, Zander does not understand what the broad term "Seamless Mobility" means as a long-term vision for the company. Worse yet, it is becoming even more clear that this vision is not even completely understood by company's employees at any level. This is something that must change by developing solid strategies that both investors and employees of the company can clearly understand.

Under Zander's leadership, the company has also started to become increasingly focused on the Mobile Devices segment of the company than ever in the past. Zander's strategies have often been focused specifically on the Mobile Devices business while giving little attention to growing the other major business units within the company which has lead to an unbalanced diversification. In the past, this diversification has helped the company as a whole to continue to be profitable even when one business unit slumps for a quarter or two due to seasonal other market factors. Instead, Zander has sought to shrink the size of the other business units while selling off portions instead working to improve and revitalize such segments like the Automotive group where the company's name sprouted. Fortunately though, extraordinary leadership by Greg Brown and especially Dan Moloney have allowed these other two segments of the company to flourish and gain market share in the midst of the failings in the Mobiles Devices business. Unfortunately, even significant growth in these other business units cannot compensate for the losses of the Mobile Devices business due to the unbalanced diversification that has been created. In truth, the neglect by Zander towards the other two business units might actually have been a godsend since it has allowed both Brown and Moloney to do their jobs and do them right. It is unclear but likely that Ron Garriques' departure from the company had a great deal to do with Zander's meddling in the affairs of the Mobile Devices business while not allowing Garriques to do his job like he might desire.

Irrespective of what personnel changes are made to the senior management team, and when they are made, the Board must immediately renegotiate Zander's severance package to ensure that he does not receive $30 million simply for leaving the company. He is already highly compensated and won't have any trouble finding a new job. This obscene severance package must be eliminated as a measure of good faith that Motorola's employees and shareholders won't have to keep paying the price long after Zander's reign has ended.

Replace Judy Lewent, Nicolas Negroponte, Samuel Scott III, and Dr. John White on the Motorola Board of Directors with experienced business professionals such as Carl Icahn.
If you had a sense of déjà vu watching what happened with RAZR, it's because Motorola has lived the story before of riding the wave of a hot product without sufficient heed to where the industry is moving to. Ten years ago, it was with StarTAC: the "iconic" hit phone, which was analog-based. All the signs pointed to the industry moving to digital. However, Motorola's plans for digital phones were delayed, so that additional resources could "feed the beast" of StarTAC. The company almost drove off the precipice as a result. Fortunately, for its customers, employees, and shareholders, it pulled itself back from the brink. You would hope that an organization would institutionalize the learnings of such a heralding experience. Yet, the parallels between RAZR and StarTAC are eerie. Why didn't Motorola learn?

Chris Galvin, the former CEO and grandson of Motorola's founder, is no longer around. However, 4 of Motorola's current board of 11 were around. Judy Lewent, the CFO for Merck, has served on the board since 1995. Nicolas Negroponte, a director of the MIT media lab, has been on the board since 1996. Dr. John White, the Chancellor of the University of Arkansas, has been on the board since 1995. And Samuel Scott III, the head of a corn refining business, has been on the board for almost 15 years.

In the wake of Sarbanes-Oxley, a lot of attention has rightly been paid to the issue of board "independence." It is a good thing to have directors who are sufficiently vigilant and will ask hard questions of management. Yet, how "independent" can you be when you've served on a board for over a decade? Meg Whitman, CEO of eBay, famously said that no CEO should stay in the same job for 10 years or they risk becoming stale in the saddle. We agree and think this same benchmark should apply to all corporate directors for the sake of fresh eyes and energetic vigilance.

One argument a defender of keeping a director on the same board for over a decade could make is that: it is critical for retaining some "institutional memory" in board discussions. Presumably, these longer-serving directors could remind their shorter-tenured brethren about organizational mistakes made in the past that shouldn't be repeated – such as StarTAC. We thank Ms. Lewent, Mr. Negroponte, Dr. White, and Mr. Scott for their service, but respectfully and strongly suggest that the company would be better served by new independent directors with strong business and communications experience.

Carl Icahn
We also believe that Carl Icahn possesses the aptitude to help along the transition process for our company. It is most unfortunate that Mr. Icahn did not receive a board seat at the annual shareholder meeting; this was despite great support from many smaller, non-institutional shareholders. Mr. Icahn is well versed in helping struggling companies along and generating shareholder value. His company, American Real Estate Partners LP (ACP) has a great track record of buying into under preforming or undervalued assets and making them preform in a more efficient manner.

He was one of the first to see the great potential for Motorola's shareholders in the coming years, and as a result purchased millions of shares in effort to change the direction of the company. Thanks to his efforts, Motorola has not only started to repurchase shares more quickly than before, but it is doing so on a much larger scale than previously planned. For these reasons, we believe that Carl Icahn be on the board of directors. Icahn's fate is ultimately the same as ours, and with his help, we will be able to generate sizable returns that the inept leaders of Motorola have not been able to for quite sometime.

Appoint Edward Lampert to the Motorola Board and others with deep communications experience
As mentioned above, the Motorola board has – in the past – chosen to appoint directors with an abundance of experience outside Motorola's core communications industry. While we don't advocate a board only consisting of industry veterans, we believe a solid majority should be experienced within the markets in which Motorola directly competes, rather than – for example – from the pharmaceutical, consumer packaged goods, agricultural, and academic worlds. Therefore, we suggest replacements for the 4 people named above reflect this. New Motorola director David Dorman who is ex-AT&T fits the bill for what we're asking.

Strong business experience and a track record of success are also important criteria for a director. So is the psychological importance of owning stock in the company (which a director has directly purchased, as opposed to stock ownership through stock grants or stock options received as partial compensation for board service). We note that 10 out of 11 of the current Motorola directors own less than 50,000 shares, with 4 directors owning less than 5,000 shares (and we suspect that most of these holdings came through stock grants or through stock options received, rather than digging into their own pockets to purchase stock). In our opinion, that is simply not enough "skin in the game" for a corporate director of a major global company.

One candidate that we believe fits the bill for a strong track record of business experience, as well as Motorola stock ownership, is Edward Lampert of ESL Investments Inc. Mr. Lampert disclosed he is now a holder of Motorola stock following the May annual meeting. We suggest that Motorola make a spot available for him immediately at the board of directors' table.

Outline the long-term vision and strategy for Motorola
In the May Lehman Brothers speech, Mr. Zander said a company's strategy shouldn't change year to year, but its tactics should. We couldn't agree more. However, the stated strategy is simply "Seamless Mobility." A recent analyst who has analyzed the clarity of Mr. Zander's letters to shareholders for the last few years, according to the Wall Street Journal, called them "Bafflegab." A notable quotation from the 2005 Motorola annual report letter cited is: "Motorola's going to own Seamless Mobility, where today's hottest technology is converging -- where the Mobile Me lives -- where mobile broadband means everything everywhere and anything anywhere." A new clichéd term Mr. Zander is fond of using is "profit pools" (as in "we've got to find the profit pools"). Three and a half years into his tenure, the company and its shareholders desperately need to better understand the strategy for turning things around.

The recent attack which Motorola's board directed at Mr. Icahn leading up to the annual meeting was – in our opinion – a smoke-screen. By asking shareholders to focus on the number of directorships currently held by Mr. Icahn, Motorola's leadership avoided having to better explain its strategy for the company.

A long-term vision and strategy is not cost containments and site rationalizations alone. Controlling costs is obviously critical when your major division is seeing sales recede as much as they have in the last 3 quarters. Yet, no company shrank itself to greatness. The simple truth is that customers do not like the current line-up of phones and there needs to be a better strategy for more compelling phones that will raise revenue. Getting 18 new models out to market this year to lukewarm response doesn't fix that problem. The RAZR2 is 10x as fast as the RAZR and has an armload of new features, but potential customers don't seem to care. In our opinion, none of the models is a game-changing device that will sweep up the consumer or business space. They are incrementalist improvements on past styles. Recent excitement over competitors' new product launches make the differences all the more stark. So, what must the new strategy speak to? Next-generation designs.

When you first saw the Chrysler 300C, you likely turned your head; and you have designer Ralph Gilles to thank for it. The RAZR made this impact, and the late Geoffrey Frost (former Motorola Marketing head) played a key role in this. Yet, RAZR2, KRZR, ROKR, RIZR, and the Q9 appear to be so yesterday. Management is fond of talking about getting to Linux/Java platforms to make richer software experiences, and better competing with Nokia and others in certain tiers of the market in which Motorola doesn't play. They need to outline the strategy for getting better product design out of the labs and into the market.

There is one very positive sign in the Z8, however of different reasons they do not seem to make anything out of this. Probably since it is a Symbian phone. Motorola need a SW platform strategy, and Linux/Java does not obviously cut it.

Corporate strategy also has to be more than just Mobile Devices strategy. With so much attention being paid to problems in Mobile Devices, what strategic focus and resources are being applied to the other businesses? What Motorola investors want to know is what they can expect from the Networks and Connected Home businesses as part of their MOT investment in years to come. How does Zander plan to drive value from Connected Home when key competitors in that space (Alcatel-Lucent, Ericsson) are significantly larger with complete solutions. The government/public safety business has not articulated a strategy for transforming its radio network business to IP networks. How sound was the logic of acquiring Symbol in an incredibly competitive enterprise market, and what is the plan for building and successfully competing in this area? As the Infrastructure business missed the 3G build-out, how much of a commitment are they making to being a leader in 4G vs. their competitors? What was the rationale for keeping the various units other than MDB and jettisoning the Semiconductor business a few years ago? The process by which Motorola followed for getting out of the semiconductor business demonstrates poor long-term planning. The decision to spin-off the Semiconductor business was announced in October 2003. The IPO came in July 2004, delivering $1.5 billion to Motorola shareholders. The decision was defended as a way for the company to "focus" on its core businesses and increase shareholder value through the spin-out. Yet, Motorola continued to work with Freescale (the name of the spun-out entity), as if it was a business it owned within the Motorola family, sole-sourcing chips for many of its phones. Part of the recent downturn in MDB is due to the fact that Motorola has been producing phones at a cost disadvantage, because it hasn't sourced silicon from other vendors two years after the Freescale IPO. This risk should have been identified and baked into the corporate strategy by head office well in advance. In order to create compelling products Motorola must organize a group of engineers and scientists away from daily politics to dissect products like the IPhone and the Blackberry. The group then must create and proposed new compelling products in 3G and 4G that can be produced in less than a year not 2 or 3 years which is the typical cycle for new products at Motorola.

Appoint a Permanent Head of the Mobile Devices Business
Mobile Devices represents more than half of Motorola's revenues. The two smaller divisions already have appointed heads. The former head of the Mobile Devices division, Ron Garriques, left the company in February to join Dell and, about 5 months later, Motorola finally appointed a permanent replaces to the Mobile Devices division, Stu Reed. According to a press release on July 11th, "Stu Reed, executive vice president of Motorola’s Integrated Supply Chain organization, has been named president of Motorola’s Mobile Devices business effective immediately. Reed will continue to report directly to Greg Brown, president and chief operating officer." Even though a new permanent head has been appointed, there still are questions as to whether Stu Reed has the experience necessary to lead such an organization. Many feel this could be Zander grasping at straws to find a solution to the internal problems plaguing the Mobile Devices division. Apparently, similar problems plagued the former supply chain groups where Reed was able to vastly improve the operating and management structure and develop the new Integrated Supply Chain organization. Zander and the board obviously now hope he can do the same with the Mobile Devices group.

Support "Plan B"
We need all Motorola shareholders – large and small, institutional and individual – to join us, if they are also dissatisfied with Motorola's performance for the last 3.5 years and want to see better performance from their investments. They can be part of our constructive solution. There is not a quick, financial fix for Motorola. In our view, investors need to take the long-view and dig in for some difficult work ahead. The changes must start now though. Our group is made up of long-term investors in the company who are committed to seeing it return to its rightful place of industry leadership. A stronger Motorola is good for its shareholders, customers, and employees.

The time is now. We need you to "pledge" your shares towards our "Plan B" group. By doing so, you will give us the strongest possible voice with which to negotiate with the Motorola board for these changes outlined above.

To offer your comments/suggestions/additions to the Motorola "Plan B" before we formally submit it to the board, please edit this wiki (shareowneractivism.wikia.com).

To "pledge" your Motorola shares to our group – expressing your desire for us to count your shares informally in our group that we represent to Motorola as wanting to see "Plan B" enacted, go to our YouChoose.net "pledge" site.

Thanks for being part of the solution for Motorola shareholders, employees, and customers. This is a great company that can be and will be again.