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Analysis: Mobile biz spinoff could spell the end for Motorola

Posted: 05 Feb 2008 ?? ?Print Version ?Bookmark and Share

Keywords:Motorola spin-off? mobile unit? handset?

While Motorola Inc.'s decision to consider spinning off or selling its mobile unit might have only meant to silence critics of its operations, it sets the company on a path that could eventually break up the entire company.

After being anointed successor to CEO Edward Zander late last year, Greg Brown, who formerly took over in January, signaled the company would remain a single entity despite growing entreaties from analysts and billionaire investor Carl Icahn.

Brown's reversal is only now aligned with Icahn's push for the company to be broken into four separate businesses, and follows another slide in Motorola's share of the handset business in Q4.

The decline, which the company and analysts see continuing in the ongoing quarter, forces Motorola to consider exploring "the structural and strategic realignment of its businesses to better equip its Mobile Devices business to recapture global market leadership and to enhance shareholder value."

In a statement, Brown added, "We are exploring ways in which our Mobile Devices Business can accelerate its recovery and retain and attract talent while enabling our shareholders to realize the value of this great franchise."

The company said it would not discuss the topic again until its board of directors makes a final decision.

Next move
The investment community is going to have its hands full pondering what the future holds for Motorola. Indications are that shareholders, analysts and other pundits won't limit their considerations to the mobile devices unit.

Each of Motorola's four business units are expected to come under intense scrutiny over the next few months by potential investors, including venture capitalists and other corporate buyers interested in beefing up their businesses by capturing an established industry player. Also, current rivals are bound to seize the opportunity to further cut into the company's dwindling market share and poach critical engineering and other technical employees, according to analysts.

"We caution that a delay could eat substantially into the value of the handset business as competitors are likely to take advantage of the announcement to seize both market share and valuable engineering assets," Matthew Hoffman, an analyst at SG Cowen Securities Inc., said in a report.

In fact, Motorola's formal announcement of "the structural and strategic realignment of its businesses" sets in motion a process the company might not be able to stop, culminating in the possible demise of another American icon.

From spinoff to breakup
Recent U.S. corporate history has at least one example that Motorola investors, suppliers and customers might want to consider. AT&T Corp.'s former high-tech division, Lucent Technologies Inc., is just one such example.

Less than five years after breaking off from the telecom service provider in 1996, Lucent in 2000 splintered into pieces, spinning off its semiconductor division as Agere Systems Inc. and the communications equipment unit as Avaya.

Both offspring and the parent have changed dramatically since then. LSI Logic bought Agere System last year while Avaya's days as a public company ended following its purchase by a group of investors led by Silver Lake and TPG Capital.

Lucent, too, is but a fading memory in the communications equipment world having been acquired by Paris-based Alcatel Inc. in 2006.

Could Motorola, which started out as Galvin Manufacturing Corp. in 1928, also end the same way? This is a distinct possibility considering the company's recent financial performance.

After several years of solid growth during which annual revenue surged to a record $42.9 billion in 2006, Motorola has since been trending down, dragged down by its faltering mobile handset division.

Gloomy projections
Annual revenue dropped to $36.6 billion in 2007, down 15 percent from prior year. Analysts project the company's revenue will decline again in 2008 to $34.9 billion, although that total is likely to be revised downward following the company's report of persistent trouble in the handset business.

Although Motorola is selling the planned reorganization as an attempt to rejuvenate its business units, the internal history of such transactions does not bode well for the handset division.

Motorola spun off its semiconductor division as Freescale Semiconductor in 2004, but the company has failed to ignite a spark in the market. Freescale's latest results, for example, showed problems in several business units, including the cellular components unit, which counts Motorola as one of its biggest customers.

Spinning off Motorola's handset division might help boost its weak stock price in the interim, but it will not address the fundamental problems confronting the unit. Moreover, its market share losses might actually accelerate if the process distracts management attention from day-to-day operational issues.

The separation of the wireless handset division, which still accounts for more than 50 percent of Motorola's annual sales, will leave it a much smaller company and cut deeply into the leverage it has with suppliers.

Although Motorola may be more intent on spinning off the loss-making handset division, it might find investors more interested in its two profitable divisions, which means investor Icahn might still get his wish.

- Bolaji Ojo
EE Times

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