Motorola to spin off handset business (USA)U.S. vendor aims to appease shareholders, including billionaire Icahn, with separation plan; announces search for new Devices CEO.
Motorola on Wednesday revealed plans to spin off its ailing handset unit into a separate entity and announced that the hunt for a new Mobile Devices chief executive has begun.
The move comes just days after activist investor Carl Icahn, who has been vocal in his support for a spin-off for some months, filed a lawsuit against Moto over his choice of board members, and reiterated his criticism of the way the Devices unit has been managed.
Motorola plans to create two independent, publicly-traded companies – Mobile Devices and Broadband & Mobility Solutions – subject to various conditions, in 2009. The decision follows an evaluation of the business announced by Motorola earlier this year.
“Our priorities have not changed,” said Motorola CEO Greg Brown, who currently has direct control of the handset business. Brown also insisted that Moto “remain[s] committed to improving the performance of [its] Mobile Devices business.”
But some claim a split will not necessarily be good news for the handset unit.
“We do not think this transaction makes any difference to outlook for recovery at Mobile Devices and may even damage the longer-term outlook,” said Nomura Securities analyst Richard Windsor.
He explained that the trend towards software and services on mobile phones requires more integration with back-end infrastructure, something that could be hindered by the split.
Furthermore, the lengthy timeframe on Moto’s announcement means “there is a significant possibility that no split occurs,” said Windsor.
Meanwhile, Gartner research vice-present Leif-Olof Wallin noted that the time lag – before the spin-off or a possible eventual divestiture – could place Motorola’s handset business “under considerable stress”.
Inward-looking activities will take “time and focus away from products, sales and marketing, which might further fuel a negative spiral,” said Wallin. Competitors, most notably Samsung, Nokia and LG will probably gain the most during this period.”
With a product portfolio – and as far as the market knows, product pipeline – that has been found to be sorely lacking in recent years, this is something that Motorola can ill afford.
Mobile Devices posted an operating loss of $1.2 billion last year, while sales fell 33% on-year to $19 billion. By the fourth quarter the vendor’s market share had fallen to 12.4%, from close to 25% 12 months earlier, with shipments for the quarter totalling 40.9 million units. As a result, the company ceded its number two market position to rival Samsung, which shipped 46.3 million units in Q4.
Mobile Devices sale still on horizon
Many believed that Motorola would seek to sell off the Devices business, but Wednesday’s announcement suggests that offers for the unit have not been forthcoming.
“This [separation] is by far the best [option] for shareholders,” said Windsor. “A sale would have required shareholders to accept a bargain basement price or even pay someone to take Mobile Devices away.”
However, a sale of the unit could still be on the cards.
“Gartner’s interpretation is that initial talks with possible candidates have not progressed as wished and separating out the mobile devices business into a separate entity is a logical next step - a step that would have needed to happen anyway once the decision to divest was made,” added Wallin.
“The next step will be to look for buyers outside the handset business, including private equity, to spin out the handset NEWCO or possibly IPO it,” he said.
When Moto revealed that it was evaluating its options for the handset unit, speculation immediately mounted over potential buyers, with many naming the Chinese handset makers as likely contenders. However, while a few companies – including Samsung - have denied plans to acquire the business, none have publicly expressed interest.
Billionaire investor Carl Icahn, who holds 6.3% of Motorola, has been pushing for the Devices business to be sold off, and has publicly criticised the vendor for its apparent indecisiveness on the issue. On Monday Icahn again called for action, adding that making the business independent would be the only way to attract a top management team and reverse its fortunes.
As it stands, Motorola chief executive Greg Brown is in direct control of Mobile Devices, having relieved Stu Reed of his post last month. Reed, who took the role in July, has since left the company.
“We have undertaken a global search for a new chief executive officer for the Mobile Devices business,” said Brown.
“We believe strongly in our brand, our people and our intellectual property, and expect that the Mobile Devices business will be well-positioned to regain market leadership as a focused, independent company,” he added.
While analysts remain sceptical over Motorola’s chances of turning around the handset business, investors reacted positively to Wednesday’s announcement, with the vendor’s share price rising slightly.
