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Motorola spins off struggling handset business

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Following continued struggles in its mobile devices business and poor fourth-quarter earnings, Motorola today announced it would split into two publicly traded entities, separating its handset division from the company’s core focus, broadband and mobility solutions. The third-largest handset maker announced the split amid increasing pressure from investor Carl Icahn, who owns a 6.3% stake in the company and has been pressuring Motorola to sell its handset business since early this year.

The mobile devices division, which includes design, manufacturing and sales of mobile handsets and accessories, lost $1.2 billion in 2007, whereas Motorola’s other divisions earned $1.9 billion. The remaining broadband and mobility solutions business handles voice and data communication solutions and wireless broadband networks for enterprise and governments, as well as IP video, cellular and high-speed broadband network infrastructure and cable set-top receivers.

Motorola has barely clung to its third-place standing this year, losing the second-place spot to Samsung and continuing to lose market share to both Nokia and Samsung. Some analysts are saying this move could be a nod to a future joint venture for the cell phone business. Some have put their bets on an Asian handset maker to be the potential suitor, using Motorola to penetrate the US market.

On a conference call announcing the move this morning, Motorola said the split will occur as a tax-free distribution model to its shareholders and is expected to be completed in 2009, adding that there was no assurance the planned split, which is subject to further financial, tax and legal analysis, would occur. After the departure of former CEO Ed Zander and CTO Padmasree Warrior, current CEO Greg Brown is looking for a new head of the handset division.

"We expect this action to enhance recovery in mobile devices and accelerate efforts to attract a new leader," Brown said today. He did not announce which company would carry the Motorola name, only noting that the brand was important.

Analysts' reactions have been mixed. While some don’t think this move is sufficient enough to revive the business, telecom analyst Jeff Kagan said this is probably the best news to come from Motorola in quite a while and the announcement is a good start to reviving its struggling handset business.

“The company won't split up until next year in 2009,” Kagan noted. “Then it will be a while as the two companies gear up to compete. So it will be a while before we know if this will make a difference. The good news is this is a major move in the right direction…These changes give Motorola a fighting chance again. Their ability to attract and retain good workers and executives has just increased.”

Along with that optimism, Mark Sue, an analyst with RBC Capital Markets, added a dose of pragmatism.

"The initial excitement may settle after investors consider the level of disruption that will be caused as Motorola splits its company in two," he wrote in a research note this morning. "Companies usually combine divisions for operating efficiencies, but Motorola is doing the reverse. We're assuming customer confusion, supply chain interruptions, and ultimately market share loss for Motorola this year. The situation should stabilize in 2009."

"We're not convinced splitting the organization ultimately enhances the shareholder value, but at least the beleaguered company is trying different things," Sue wrote. "We would have preferred if Motorola hired a new Mobile Devices head before splitting it up and looking for someone since that would have stemmed the internal turmoil currently underway at the company."

Sue also predicted the Motorola brand would follow the handset division, since consumers are familiar with it, while the company's other half will be rebranded.

Motorola's announcement comes at an unstable time for the handset industry. The economic downturn and fear of recession worldwide could blunt the momentum of the global handset industry at a time in which Moto is already losing market share. IMS Research recently projected that global handset shipment growth would come under 6% in 2008, after several years of double-digit annual growth. In the U.S. and the rest of the Americas, IMS projected handsets sales will increase 7% in 2008, but Europe, the world's most penetrated region, will actually see a decline in handset shipments of 1.2%

While many analysts have focused on the effects the split would have on the handset unit, Forrester Research analyst Ellen Daly said the benefits for the networks and enterprise business could be even greater. "The attention that mobile devices commands both in company attention and financials does not allow their broadband and mobility solutions to grow fully and get the corporate attention it deserves," Daly said in a research note.

If the spin-off occurs, Motorola will be one of the last vendors to fully separate its phone and networks business. Ericsson and Sony combined their handset businesses in 2002, and immediately saw Ericsson's No. 2 market share evaporate as the new Sony Ericsson gear up. Siemens sold off its handset business to BenQ, which BenQ in turn shut down in 2006. Alcatel formed its own JV with Chinese vendor TCL in 2004, but it later exited the venture completely allowing TCL to market handsets under the Alcatel name. In perhaps the biggest move, though, market-leader Nokia separated its handset unit from the networks completely, forming Nokia Siemens Networks with its former competitor.

Aside from Motorola, the only major handset vendors still tied to their infrastructure divisions are the Korean manufacturers Samsung and LG Electronics. But both of those companies' networks sales are comparably tiny and--with the exception of Samsung's WiMAX division--confined primarily to their home market.

--Kevin Fitchard contributed to this story

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© 2014 Penton Media Inc.

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