OVUM on: Motorola Splits Itself in Two

By: Martin Garner, Mobile Director, Ovum
(Business News & Technology News, 28 Mar 2008)

Motorola is starting the process of splitting itself into two publicly traded companies: one consisting of the handset division, the other taking the Broadband and Mobility Solutions division.

This is the outcome of a review kicked off earlier this year by CEO Greg Brown. The process is subject to various financial, tax and legal analysis and is expected to complete some time in 2009.

This will be a big relief for Motorola investors. It promises a new start for the very troubled handset division, but it does not solve its problems.

In January this year Motorola broke the news that the handset division's performance was not improving but was going to remain weak for the rest of 2008 while waiting for development of new product platforms, which would enable a broader product portfolio. At that point it was clear that the logic for holding the company together had gone—how could it possibly be of benefit to the rest of the company to have such a wounded handset division hanging around for another 12 months?

Although markets have been troubled anyway, Motorola's share price has underperformed badly. There has been huge pressure from Carl Icahn, who owns 6.3 percent of the company to get four of his nominees onto the board, with the aim of then breaking the company up. Off the back of this announcement the share price has risen strongly as the market clearly agrees with Icahn about what needed to be done.

There has been a string of senior executives leaving the handset division recently and, although Greg Brown has personally taken charge of the division, it is clearly not just wounded now but suffering very badly. Something needed to happen.

This split will give the division an opportunity to draw a line under the recent past and offer it a new start as an independent entity, free of (most of) the corporate baggage, able to attract a new management team and then build its own position in the market. That's the theory.

To make it work Motorola must provide a period of management stability and focused, heads down, new product development. That's because the company split does not provide a short-term fix for the underlying cause of the problems ¨C the weak handset portfolio. Improving that is a long, hard process.

Of course there is a lot of work going on at present to develop new products. But, as we have said before, Motorola's Device Division management faces a really tricky balancing act during 2008: how to give the new products enough attention and motivate key staff, while limping through 2008 on an inadequate portfolio with a strong position only in the US (where the threat of recession could slow the market) as well as Nokia and Sony Ericsson explicitly targeting market share gains in its home territory.

If network operators give Motorola current products the cold shoulder this year, the company may well end up having to cut significant numbers of staff during 2008 and scale back its new product development. That would mean that the New Motorola would emerge onto the market in 2009 as a much smaller player.

This split has heightened speculation that the new handset unit will become an acquisition or JV target. We think it's really too early to tell. It became clear over the last few months that the other major handset players are not interested at present (they'd probably prefer Motorola to go away as a competitor). Other types of company may be interested, private equity too.

However, we generally feel that companies would be far happier buying into the handset market if they could get a smaller company that's performing well, and could be scaled up, rather than a much bigger company that has profound problems to sort out. The recent history with Benq and Siemens underlines this.

Splitting the company like this is the right thing to do. We think it should be done as quickly as possible—within six months if that is feasible—because the longer the current conditions go on, the harder it will be for Motorola's new handset business when it is formed.

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