Firing workers isn't fixing problems

By Jim Jubak

Fire more workers.

That's the solution offered by the CEOs of Motorola (MOT, news, msgs) and Pfizer (PFE, news, msgs) to the problems at those companies. Shortly after announcing disappointing earnings for the December 2006 quarter -- a drop of 31% from 2005 for Motorola and a decline of 16% for Pfizer -- the companies announced plans to cut 3,500 jobs and 10,000 jobs, respectively.

Both CEOs, Edward Zander at Motorola and Jeffrey Kindler at Pfizer, of course, kept their jobs and their paychecks. According to Motorola's latest proxy statement, Zander received a salary of $1.5 million, a $3 million bonus and $2.3 million in restricted stock in 2005. Kinder has only been on the job since last July. Before that he was vice chairman and general counsel, with an annual compensation package worth $3 million, according to Forbes. He was brought in to revive a company that had slumped under his predecessor, Henry McKinnell, who received a retirement package of $180 million.

For this kind of money, investors -- let alone the workers who are being fired -- deserve something a little more imaginative as a turnaround strategy. Cutting jobs has become a reflex, not because it works especially well at fixing the real problems at companies like these but because firings produce the kind of immediate earnings improvements that help CEOs keep their jobs.

Getting rid of workers, you see, lets a company forecast the kind of immediate cost savings and surging profit margins that keep shareholders from marching on the executive suite. Pfizer threw shareholders an even bigger bone by authorizing $10 billion in share buybacks in 2007 and promising further increases in the company's dividend payout.

None of this has anything to do with fixing the problem facing both two companies: a failure to innovate. Neither company has been able to figure out how to come up with a steady stream of new products -- despite spending big on research and development -- to replace aging big sellers facing crushing competition. You could even argue that firing 5% and 10% of your work force, as Motorola and Pfizer did, throws a company into turmoil just at the time when it needs everybody to pull together.

Unfortunately, Motorola and Pfizer are pursuing an all-too-common strategy these days. Companies are long on financial engineering, cost-cutting, share buybacks and acquisitions, but short on innovation and capital spending today to generate profits tomorrow. That will change, but until it does, investors will find themselves looking at a landscape like the current one, a landscape that's very, very short on great growth stocks.

Early ripe, early rot

So what's wrong at Motorola? Pretty much the same old thing that Zander was brought in to fix. The company can create great individual products, such as the Razr phone, that sell like hot cakes when they first hit the market. But the company can't create a steady stream of new items to keep its product line fresh and competitors chasing a moving target.

The result is that profit margins on even great products such as the Razr start to fall. Sales for the company's mobile device division, the company's biggest business, climbed by 19% as the company shipped a record 66 million handsets in the fourth quarter, up 47% from the same quarter in 2005. But operating earnings for the mobile devices division fell by 49%.

The bottom line was that Motorola sold a lot of phones -- enough to pick up about a percentage point of global market share in the quarter and to give the No. 2 wireless handset company -- behind Nokia (NOK, news, msgs) -- a 23% share. But with prices down about 16% on average from the fourth quarter of 2005, according to IYSKE Bank, those sales were less profitable. Operating margins fell to about 5% from 12% in the third quarter.

Motorola told investors it expects to see margins climb back to 10% in 2007 in the mobile devices division. If it achieves that, earnings in 2007 will come in around $1.20 a share, essentially flat with 2006. Not exactly what a growth-stock investor is looking for.

And, of course, there's no guarantee that Motorola can pull that off. The company does have what looks to be a strong lineup of new products for the second half of the year, but they will be competing against new products from Sony (SNE, news, msgs) and Samsung Electronics (SSNLF, news, msgs) as well as Apple (AAPL, news, msgs). Nokia has shown that it's willing to cut prices to keep market share. Under the circumstances, Wall Street investment houses are projecting lower operating margins. Kaufman Bros., for example, has lowered its 2007 estimate for mobile-device operating margins to 5.9% in 2007 from an earlier projection of 6.4%.

But even if Motorola and CEO Zander do pull another Razr out of their hat, it seems the company is still stuck in a boom-and-bust cycle. Steady growth is an elusive goal.

You need something to sell

Innovation, or the lack of it, also is at the core of Pfizer's problems, but at Pfizer generating solid future growth may be even more of a challenge. The company has never been especially good at finding new drugs. Instead, it built its growth record on the strength of a best-in-the-industry sales force.

These guys and gals were so good -- they had so much market clout -- that other drug companies were lined up around the block to have their newest discoveries turned into blockbuster products by Pfizer. And if the drug's potential was big enough, Pfizer would acquire the other company lock, stock and test tubes.

That's what happened with cholesterol drug Lipitor. The best-selling drug in the world started out as being jointly marketed by Pfizer and Warner Lambert until, in 2000, Pfizer bought its marketing partner outright. Same with another blockbuster, arthritis drug Celebrex, added to the Pfizer stable when the company acquired joint marketing partner Pharmacia in 2003.

Unfortunately for Pfizer, the big-sales-force model isn't working so well anymore. Partly that's a result of more big drugs going off patent and a dearth of new blockbuster drugs coming to market.

There are simply fewer potential blockbusters to feed into Pfizer's marketing machine. And when there is, it's being fought over fiercely by every big drug company. If it's a potential drug from a smaller biotech company, it's being acquired earlier in the testing process. All of which means fewer drugs for Pfizer's sales force to market, more expensive acquisitions when a potential blockbuster does become available and more failures when a drug candidate goes from promise to flameout before it gets to market.

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