Motorola's Market Share Mess

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Unable to stem its own mobile-phone losses, Motorola is believed to have tried to sell the handset division. When those efforts failed, it opted to spin it off. Now the spin-off plans are faltering as well, in part because the economic slump is eroding demand at Motorola's other businesses and weakening the company's financial standing, analysts say. "Any deterioration in [other divisions] will place additional pressure on profitability and cash flow with implications for the timing and viability of the planned spin-off of the handset business," Avian's Thornton wrote in a July 7 report.

On June 23, Piper Jaffray (PJC) analyst T. Michael Walkley cut Motorola shares to sell in part because he doubts the spin-off is likely any time soon. Motorola stock fell 18¢, or 2.5%, to 7.15 on July 9. The shares have declined 56% since the beginning of the year.

Even if Motorola succeeds in spinning off the money-losing business, public markets may not welcome it with open arms. "We never were confident the separation would generate more shareholder value," says Todd Rosenbluth, an analyst at Standard & Poor's, which, like BusinessWeek.com, is owned by The McGraw-Hill Companies (MHP). "The handset business has been supported by sales to cable customers and government contracts. A struggling business on its own may not be the best thing for investors."

Any Buyers?

So what's Motorola's Plan C? Weyrauch, the spokeswoman, says the company is "moving forward with our plans to create two independent, publicly traded companies." American Technology Research analyst Mark McKechnie says shuttering the business is now a real possibility.

Motorola could also revert to Plan A, some analysts say. "We think they are going to get acquired rather than be spun off successfully," says Richard Doherty, director of consultancy Envisioneering Group. In that case, Motorola would be lucky to fetch $500 million, says McKechnie, who as recently as a half-year ago valued the business at $8 billion. Since then, however, market share slides and continued share price declines have prompted him to revise his estimate. Another analyst, Richard Windsor of Nomura, believes Motorola may actually need to pay someone to take the handset division off its hands.

All of this presupposes Motorola can find a buyer in the first place, however. Private equity firms could be induced to buy the division on the cheap. Firms including Bain Capital are reportedly bidding for rival handset maker Huawei, and on July 1, AIG Investments (AIG) purchased UTStarcom's (UTSI) handset business for $240 million. "There are people who want to buy handset companies, and it might be a good time to sell," says David Chamberlain, an analyst at consultancy In-Stat.

Meantime, someone needs to run the business and Motorola may have a hard time finding that person. Sources who asked to remain anonymous tell BusinessWeek.com that at least two people, including an internal candidate and Todd Bradley, an executive vice-president at Hewlett-Packard (HPQ), have declined the top job. Weyrauch declined to comment on the executive search. Rosenbluth sums up the concerns left on many people's minds: "We thought by now we'd have more details [on the restructuring and the new CEO], and the lack of details is disconcerting."

Kharif is a senior writer for BusinessWeek.com in Portland, Ore. Crockett is deputy manager of BusinessWeek's Chicago bureau .