U.S. News

Motorola Warns of Quarterly Loss; Palm Buy Still Possible

Jim Goldman

Motorola sharply scaled back its first-quarter earnings estimate, named a new president and chief operating officer, and announced the retirement of its current chief financial officer.

Meanwhile, a major Palm shareholder told CNBC he expects Motorola to announce as soon as Thursday a deal to acquire Palm for roughly $2 billion.

The shareholder, who preferred not to be identified or have his stake disclosed, said that until a few weeks ago, negotiations to buy the troubled handheld device maker were limited to Nokia and two private equity firms, Silver Lake Partners and Texas Pacific Group. But since then, Motorola has entered the fray and looks like the likely winner.

"For Motorola, I think it's the threat of Nokia owning Palm," the shareholder told CNBC. "The upside for Motorola is much greater. If they own Palm, they're really the most substantial player running the windows (mobile) operating system. Motorola could become a key Microsoft partner."

Motorola Chief Executive Officer Ed Zander, who is dealing with a swirl of speculation about his future at the company, will apparently keep his post.

Zander flatly denied that his recent cancellation of a scheduled keynote address at a conference sponsored by CTIA, a wireless industry association, had any connection to a possible leverage buyout of his company or a possible purchase of Palm by Motorola.

Moto Update

"I have a personal family thing that -- I don't believe I'm talking about this," Zander said. "I hate that this is coming up with my family. We called CTIA a couple of weeks ago. We asked if they had a replacement, and they said they had plenty of options. That's what this is about. That's that. I'm not going any further into my personal life."

Motorola shares fell as much as 6% in after-market trading Wednesday.

The company now projects first-quarter revenue in the range of $9.2 billion to $9.3 billion. The consensus sales estimate for the company's first quarter had been around $10.46 billion, according to Thomson Financial.

Motorola also forecast that it will post a loss of 7 to 9 cents. Analysts had expected the company to generate a profit of 17 cents a share.

Motorola said it will increase its stock repurchase program by $2 billion, to $7.5 billion.

New President Named

The company named Greg Brown president and chief operating officer, and appointed Thomas Meredith acting chief financial officer.

"Performance in our Mobile Devices business continues to be unacceptable, and we are committed to restoring its profitability," CEO Zander said in a statement. "After a further review following the leadership change in our Mobile Devices business, we now recognize that returning the business to acceptable performance will take more time and greater effort."

"The steps we are announcing today will enable Motorola to perform better for our shareholders, customers, partners and employees," Zander said. "I am confident Motorola has the right assets, brand and intellectual property, as well as a strong heritage of innovation and a strong balance sheet -- all of which we will draw upon in the coming months."

Pablo Perez-Fernandez, wireless analyst at G-Square Asset Management, called the news a financial "train wreck" for the wireless handset manufacturer, saying the company's announcements show just how dire its financial picture has become.

Palm Acquisition Still Possible

Perez-Fernandez said the news could bolster speculation surrounding a possible deal for Motorola to acquire Palm.

Earlier Wednesday, a major Palm shareholder told CNBC that a $2 billion deal between the two companies was imminent. Palm is scheduled to release its third-quarter results on Thursday.

Wednesday's Motorola news indicates a complete meltdown of the company's margins and average selling prices for mobile handsets, Perez-Fernandez said. Buying a company like Palm, with its higher-capability, higher-priced "smart phones," would lift Motorola margins and help raise Motorola's average selling prices as well, he said.

Palm is dramatically smaller than Motorola -- selling fewer than 5 million handsets last year compared with more than 217 million for Motorola -- but the company's focus on smartphones is compelling since it's the fastest-growing handset sector.

Motorola has dabbled in smartphones, but its "Q" product has not met with the early success company officials had hoped for. Motorola has been unable to crack Research in Motion's stranglehold on business customers with its Blackberry juggernaut.

Conventional wisdom around a Motorola buy-out of Palm says that the deal could give Motorola a critical entry into the lucrative, higher-margin business market.