http://www.businessweek.com/stories/2008-02-01/motorola-the-end-of-an-errorbusinessweek-business-news-stock-market-and-financial-advice

Technology

Motorola: The End of an Error


The Razr maker will likely sell or spin off its cell-phone division, and in the meantime, is replacing the unit’s current head with CEO Greg Brown

For connoisseurs of American electronics, Jan. 31 marks what may become the end of a technology icon. Motorola (MOT), the largest and most successful cell-phone manufacturer in the U.S., announced it's considering separating the cell-phone division from the rest of its businesses, possibly through a sale.

The company had to say there's no assurance a transaction will occur, but the statement from recently appointed Chief Executive Greg Brown reads like a fait accompli. "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," Brown said.

The fact is, Motorola management has been unable to speed up the recovery under its current structure. It's just not clear whether Motorola would sell the cell-phone unit or spin it off to shareholders. The company said it won't discuss the options under consideration until the board of directors picks one. Meantime, in a bid to shore up the handset business, CEO Brown will assume direct responsibility for the mobile devices unit, effectively demoting the division’s current president, Stu Reed, BusinessWeek has learned. Reed will remain at Motorola for now, but the cell phone division's lieutenants will report to Brown, according to a memo that was circulated to staff on Feb. 1.

Failed Profitability Attempts

Motorola has been under immense pressure to fix its ailing mobile devices business, which tumbled last year from No. 2 in the world behind Nokia (NOK), to No. 3 behind Samsung Electronics—failed to produce a best-selling phone that could match the allure of the Razr, which debuted in 2004. Revenue has dwindled and losses mounted, causing shares to lose 42% of their value over the past year.

Wall Street battered the shares again last week, when Brown acknowledged in an earnings conference call that a recovery in the cell-phone business isn't likely until next year at the earliest (BusinessWeek.com, 1/24/08).

In a desperate attempt to cut costs and return to profitability, Motorola has axed thousands of engineers and managers. Now, "they are acknowledging this is a pickle they're in," says Mark McKechnie, an analyst with American Technology Research. "They have the core technology, but they don't know how to run a handset business. Some of the best engineers on the planet left in the recent cuts."

Investors including Carl Icahn, dismayed by the company's worsening performance, advocated for a spin-off of the phone unit for nearly a year (BusinessWeek.com, 5/7/07). "I am pleased to see that Motorola is finally exploring that proposal," Icahn said in a statement. Icahn has also said he believes the cell-phone division could sell for about $20 billion, roughly the amount of the unit's annual revenue.

Possible Suitors

The prospect of a sale has analysts placing bets on which company, if any, would be willing to buy a handset business with such serious problems. The unit has negative margins; scant toehold in the sizzling market for third-generation phones that download photos, videos, and other data at high speeds; and consequently, diminishing market share.

Still, it's not out of the question that one of Motorola's chief rivals could pounce. LG Electronics, currently the world's No. 5 cell-phone maker, already has a beachhead in the U.S. via its partnership with Verizon Wireless. But it's a weak player in the technology used by AT&T (T) and Deutsche Telekom's (DT) T-Mobile. With Motorola's gear, LG could close in on Samsung and Nokia, says an analyst who has covered the industry for years. Nor is it unthinkable that Samsung would snap up Motorola's assets. "That would give them a chance to close in on Nokia," the analyst says of either potential acquirer.

There are also several smaller Asian hardware players that are looking to jump into the wireless world. Huawei Technologies and even Lenovo Group, which recently bought IBM's (IBM) PC business, are possible suitors, says Oppenheimer & Co. analyst Ittai Kidron. Private equity players are also logical candidates, analysts say.

The challenge is that it will take a great deal of investment to get the business back on track. And, even then, competing successfully with the likes of Nokia, Samsung, and others will be tough. "It's not going to be easy," says Kidron. "There's a lot of risk in taking it on."

The End of Another Chapter

And what of the business left at Motorola? Without cell phones, 51% of the one-time phone giant's business would be left with units that are profitable, though considerably less sexy. One sells TV set-top boxes and wireless network equipment, and the other sells wireless equipment to enterprise customers and government agencies. Analysts have valued Motorola, without the mobile devices division, at about $30 billion.

In the annals of technology, the dissolution of Motorola's cell-phone business would mark the end of an era. This is the company that invented the market in 1983, and then built a reputation for iconic, if only occasional, design blockbusters. It wowed the market with its StarTac in 1996, riding high as the world's No. 1 mobile-phone producer. After being usurped by Nokia, it generated talk that it might once again regain the top spot when it introduced the super-thin Razr earlier this decade.

But Motorola also has a history of creating and excelling in markets only to exit them amid stiff competition. It was a standout in the car radio business and later in the TV business during the 1950s and 1960s. It eventually shuttered both. In TV production, for example, it ceded to the Japanese, who now dominate the market. "It certainly would be a sad thing to see handsets go to zero," McKechnie says. "But that's what companies do."


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