Communications giant Motorola announced on March 26, 2008 that it would split into two separate, publicly traded companies. Despite rosy proclamations by the company about “creating value for all Motorola shareholders,” there was speculation that the company was actually trying to isolate problems in its handset division, Mobile Devices.

“Our decision to separate our Mobile Devices and Broadband & Mobility Solutions businesses follows a review process undertaken by our management team and Board of Directors, together with independent advisors,” said Greg Brown, Motorola’s president and chief executive officer.

“Creating two industry-leading companies will provide improved flexibility, more tailored capital structures, and increased management focus – as well as more targeted investment opportunities for our shareholders.”

Sources said that the split was a result of pressure coming from billionaire investor Carl Icahn to rid Motorola of the money-losing portable handset business it started twenty five years ago with the “brick.” Icahn, the second largest shareholder with about 6%, has said the division is undervalued and demanded that it be separated with new management. In the last two years, Motorola stock has fallen 56 percent primarily due to a sales downturn in the handset business.



Motorola’s History in Handsets

Last year, 2007, was a particularly bad year for Motorola’s handset business as it floundered to find a repeat of the success of its Razr handset. After introducing the first portable cellular phone, the DynaTac, in 1984, Motorola became an industry leader in mobile handsets, leveraging technical and manufacturing assets from its two way radio business.

In 1996, Motorola again attracted a large market share in handsets when it introduced the StarTac, a handset that folded up and flipped open, reminiscent of the communicator used in Star Trek. The StarTac sold for $1,000 for 2-3 years until lower cost competitors hit the market.

Ed Zander was made president/CEO in 2004, replacing Christopher Galvin, the grandson of Motorola’s founder, ending the family’s 75-year control of the company. Under Zander, Motorola introduced the Razr, and began recovering market share. Razr created the category of slim phones in 2004, selling initially for $500.

But, the Razr has lost most of its appeal, and is now free with some calling plans. It appears to have been a one hit wonder, so Zander was replaced by Brown in November of last year. In the fourth quarter of 2007, Motorola’s handset shipments crashed, dropping 38% while all its major competitors reported increases.



Losses Mount

Motorola’s handset business lost $388 million last quarter, while the Broadband & Mobility Solutions had a profit of $192 million on 11 percent sales growth, and the unit making radios and scanners had a profit of $451 million and a 35 percent revenue increase.

Analysts believe that, given current conditions, the handset business will probably be worth $1.69 a share next year, while other analysts have pegged the other division at around $7.49.

Motorola officials declined to comment on the effect of the split on earnings or what will happen to the Motorola brand name.



Split Plan

Based on current plans, Brown said the creation of the two stand-alone businesses is expected to take the form of a tax-free distribution to Motorola’s shareholders resulting in shareholders holding shares of two independent and publicly-traded companies:

•    The Mobile Devices business is one of the biggest in multi-mode, multi-band communications products and technologies. The business designs, manufactures and sells mobile handsets and accessories globally with integrated software solutions that incorporate the latest personal communications technologies. It also licenses a portfolio of intellectual property.

•    The Broadband & Mobility Solutions business includes Motorola’s Enterprise Mobility, Government and Public Safety, and Home and Networks businesses. These businesses manufacture, design, integrate, and service voice and data communication solutions and wireless broadband networks for enterprises and government and public safety customers worldwide. These businesses also provide end-to-end digital and Internet Protocol (IP) video solutions, cellular and high speed broadband network infrastructure, cable set-top receivers, and associated customer premise equipment for residential and commercial wireless network system access.

In the announcement, Motorola president Greg Brown said that one company will continue to focus on handsets while the other will sell network equipment, cable TV set-top boxes and two-way radios. These latter businesses, Broadband & Mobility Solutions, are growing faster and are more profitable than the handset business. Motorola said Brown will stay with this division, and look for a new chief executive officer for the phone business.



Split Causes Confusion

The company said the split will occur sometime in 2009, giving Brown time to try and build up the Mobile Devices unit before the split.  Some analysts have said that the split could take 18 months to happen, and that the conditions could be very different from what they are today. Others suggested that the decision to split could make it easier for Motorola to negotiate some other deal, such as a joint venture or an outright sale of the Mobile Devices division. In the meantime, both divisions will be in a state of suspense.

“Our priorities have not changed with today’s announcement,” added Brown. “We remain committed to improving the performance of our Mobile Devices business by delivering compelling products that meet the needs of customers and consumers around the world. As part of that effort, we have undertaken a global search for a new chief executive officer for the Mobile Devices business. 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.”

The completion of any separation transaction would be subject to certain customary conditions, including implementation of inter-company agreements, filing of required documents with the Securities and Exchange Commission and receipt of an opinion of counsel or a ruling from the Internal Revenue Service as to the tax-free nature of any transaction. The Company expects that the separation of its businesses, if consummated, would take place in 2009.



Impact on Prepaid Wireless

While the Motorola divestiture plays itself out, the U.S. handset market may be in a state of confusion with competitors like Nokia fighting hard for market share. Since prepaid is one of the fastest growing segments of wireless, it is likely that handsets will be used to try and leverage prepaid market share. This could result in a plethora of new handsets, designed for non-contractual prepaid services, with features that appeal to those users.