Moto and WiMAX
>> Edward Zander's $15-Billion Question
Julie Johnsson
Crane's Chicago Business
July 15, 2006
chicagobusiness.com
Wall Street wants Edward Zander to do a deal now — but he's looking far into the future
As a teenager working for 50 cents an hour at Buddy's Burgers on Long Island, N.Y., Edward Zander learned what it was like to have a tough boss.
Owner George Lukon monitored his employees' every move, some nights sitting in his car across the street to make sure the lights didn't go out even a few minutes before the restaurant's midnight closing time.
"He was meticulous on everything," recalls Mr. Zander, CEO of Motorola Inc. "If the grill was dirty, he'd just annihilate you."
Today, Mr. Zander's got an even tougher boss: Wall Street. In just over 2½ years at Motorola, he has quintupled the company's profits and increased sales 52%. But that hasn't satisfied investors, who have bid Motorola's share price down 17% this year.
With $15 billion in the bank and a stock price in the doldrums, Mr. Zander is under immense pressure to catch Nokia Corp. in the cell phone market, to produce a follow-up to the wildly successful Razr phone and to revitalize Motorola's lagging network equipment business.
And while Mr. Zander's plan for cell phones is clear — keep churning out ultra-thin phones and other devices derived from the Razr — his plan for the $11.2-billion network division is mysterious. As competitors consolidate, Wall Street wants Mr. Zander to make a splashy acquisition. But he's resistant, insisting big deals are the road to ruin. Instead, he's devoting the company's resources to a potentially groundbreaking communication technology.
It's a frustrating and unfamiliar situation for Mr. Zander, 59. He has no previous CEO experience, and while he spent three years as president and chief operating officer of Sun Microsystems Inc., its revenues were less than half Motorola's annual sales of $35.26 billion. He has seen many a CEO cave in to Wall Street pressure to make an acquisition, only to take a beating because investors think the price is too high or the deal too risky.
"The Street tells me if I do one of those big (deals), they would hate me for life," he grumbles. "If I didn't, they would still hate me."
'Wait-And-See Stock'
Since taking over as CEO, Mr. Zander has brought new vigor to Motorola, uprooting much of the company's moribund culture and lighting a fire under its consumer marketing (Crain's, July 10). The results have been most evident in the company's handset division, which, led by the wildly successful Razr, has closed the gap on market leader Nokia.
But lately, investors have grown impatient. "It's a wait-and-see stock," says Jim McCarthy, COO and portfolio manager with California-based Legacy Capital Management Inc., which holds $3 million in Motorola shares.
Mainly, investors are waiting to see how Mr. Zander plans to spend Motorola's $14.65 billion in cash — half of it accumulated in his 30 months on the job. Mr. Zander must either spend the money on an acquisition or return it to shareholders in the form of share buybacks or a dividend.
Wall Street would much rather he use the cash to make a deal that would boost Motorola's profitability. Mr. Zander doubled Motorola's operating margin to 10% last quarter, but that still lags Nokia's 14%. "If there's a single number that can drive down Motorola's stock, it's the margin," says Albert Lin, a telecom analyst with American Technology Research Inc., a San Francisco-based market research firm.
The key to making Motorola more profitable lies in the network division. That business accounts for 26% of Motorola's revenue and rings up higher operating margins than the cell phone business. But both sales and margins are slipping — in the first quarter the network division's revenue fell 8% to $2.52 billion vs. the year before; operating margin fell to 11.5% from 15% — thanks to a weak product lineup.
That's why analysts say Mr. Zander should make an acquisition. They also point to the rapid consolidation sweeping the industry. Last month, archrival Nokia announced a $30-billion joint venture with Siemens A.G., and France's Alcatel is merging with Lucent Technologies Inc.
Those deals leave Motorola a distant fifth in the equipment business with 8% of the market, compared with leader Ericsson Corp.'s 30%. The only way to quickly improve that position is to swallow another equipment maker.
"The longer they wait, the more painful it becomes," says Joe Chiasson, telecom analyst with Pennsylvania-based Susquehanna Financial Group LLP.
Speculation in recent months has linked Motorola to virtually every attractive takeover target in the business, including Naperville-based Tellabs Inc. and Canadian giant Nortel Networks Corp. Both companies declined to comment. Nortel seems unlikely because the company is still recovering from an accounting scandal, and it's led by Mike S. Zafirovski, the former Motorola chief operating officer who was passed over for Mr. Zander's job and sued by Motorola after going to Nortel. Still, Nortel's name keeps coming up because, unlike Motorola, it has a strong portfolio of third-generation (3G) wireless equipment — the technology most in demand by U.S. wireless operators.
But Mr. Zander is no fan of headline-grabbing deals. He spent most of his career in Silicon Valley, where he saw many a mega-merger go awry — most recently Hewlett-Packard Co.'s takeover of Compaq Computer Corp. "I'm very wary of big technology mergers that involve lots of architecture, people, intellectual property," he says. "They just don't work. They never have."
Skipping A Generation
It's not just that Mr. Zander doesn't like big deals. He's convinced that an investment in 3G is an investment in the past. "We don't have a good position in 3G; never have, never will," he says. "I'm more interested in the next big thing."
His idea of the next big thing: communications that run over the Internet. "It's the wild card," he says. "Our lives are going to be changed."
Motorola is investing in a number of alternative technologies, the most promising of which — known as WiMax — provides broadband Internet access over far greater distances than Wi-Fi and at much higher speeds than current cellular networks. WiMax's powerful signals let operators beam phone and video via Internet protocol, opening up an array of new services.
Motorola is already a leading developer of WiMax, and earlier this month it joined a group led by Intel Corp. in placing an eye-popping $900 million in a WiMax upstart founded by telecom pioneer Craig McCaw, one of the largest venture investments on record. California-based Intel put up $600 million of that total; Motorola didn't disclose how much of the balance it contributed.
Mr. Zander is closely monitoring the initiative and personally reviews the WiMax products in Moto's pipeline, says Dan Coombes, who heads product development for WiMax and Wi-Fi at Motorola. He also serves as chief technology officer for the networks and enterprise business.
"This is one of our big bets," Mr. Coombes says. "We see the opportunity for this to be as big as cellular."
It's a risky bet. WiMax isn't expected to take off for another two to three years. It's a natural fit for developing nations that have limited infrastructure, such as Pakistan, which is using Motorola equipment to build a nationwide WiMax network. But in the U.S. and Europe, wireless operators aren't likely to embrace WiMax anytime soon after pouring billions into 3G.
Doubling Down On The Future
For all his talk about the perils of deal-making, Mr. Zander isn't likely to pass up an opportunity to make a deal if he finds the right technology at the right price. Motorola could afford an equipment maker that's strong in Internet-based communications like Juniper Networks Inc. or one of its mid-sized counterparts, Redback Networks Inc. or Sonus Networks Inc. California-based Juniper, the biggest of those companies, is valued at just $8 billion. Representatives from those companies declined to comment.
Acquiring any of those companies would instantly make Motorola more profitable — last year Juniper posted 22% operating margins on $2 billion in sales — and while none would provide a substantial revenue boost, they would satisfy Mr. Zander's desire to stake Motorola to the future of communications.
"I'd rather buy the future than the past," he says. "I'd rather double down on where the future's going than consolidate where the world has been." <<
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