Motorola hits redial on handset biz

Motorola is hoping two is better than one.

On Wednesday, the company, whose cell phone business has been in a death spiral for several quarters, announced that after a two-month formal analysis, it has decided to split the company into two publicly traded entities.

One will handle handsets and accessories while the other will continue to concentrate on wireless broadband and enterprise communication products.

"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," CEO Greg Brown said in a release.

The Mobile Devices business will handle the designs, manufacturing, and sales of mobile handsets and accessories, and will license a portfolio of intellectual property. The Broadband & Mobility Solutions business will handle service voice and data communication solutions and wireless broadband networks for enterprises and governments. It will also handle IP video, cellular, and high-speed broadband network infrastructure, and cable set-top receivers.

Investor Carl Icahn has been pressuring the company to separate out its mobile phone business, and has been engaged in a protracted legal struggle with the company regarding its future. Motorola offered up two board seats to Icahn this week, but the activist investor rejected the offer. Brown declined to comment on how this latest news will impact discussions with Icahn's camp.

In some respects it looks as if Motorola is giving Icahn some of what he originally wanted. The company is splitting off the handset business to increase shareholder value. Details of the transaction, which, if it's accepted by shareholders, would be complete in 2009, were not discussed during a conference call the company held Wednesday morning with investors and analysts.

Pressure from all quarters
Many experts agree that something had to be done. The company's iconic cell phone division, which typically makes up more than half its revenue, hasn't had a hit since the highly popular Razr. As a result, it's seen its global market share plunge from more than 20 percent a year ago to just 12 percent today. And it's fallen from second place in the cell phone market to third place, behind Nokia and Samsung Electronics.

To make matters worse, it doesn't look like things are going to turn around anytime soon. During the company's fourth-quarter conference call in January, Brown told investors that it would take longer than expected to turn around the troubled cell phone business. The company warned that revenue and market share would likely decline further in the first quarter. A week later, the company announced it was considering spinning off the division.

Over the last two months, Brown has emphasized the company's commitment to its mobile business. Now the company is moving forward with a plan of action. Wall Street reacted positively Wednesday morning, boosting the company's shares almost 3.5 percent, to $10.09 per share, over Tuesday's close of $9.76 per share.

Uncertainties about the likely result--and preserving the brand
But many questions linger. For one, how will spinning off the business unit actually help the company get back on track? And then there is the question of brand. Motorola has an 80-year history as a communications provider. The company practically invented the cell phone industry in the 1980s. So what will it do with a brand it has spent billions of dollars and decades creating?

Brown gave vague answers to these questions during the conference call. He reasoned that splitting Motorola into two separate companies will allow management teams to focus and tailor their financials to the needs of those businesses.

Ellen Daley, an analyst with Forrester Research, agrees that splitting the company could be helpful in this regard.

"Separating (the handset business) into a dedicated unit allows (Motorola) the runway to fix some of its issues in supply chain, innovation," she said in an e-mail. "It is a fundamentally different business than the other half of their growing business, i.e. enterprise mobility, connected home and networks business."

It will also likely allow these other businesses more room to grow on their own, she said.

But even though it's easy to see how Motorola's other businesses might benefit from the separation, it's still a bit unclear what will really be different in the handset division. The company's problem is that it isn't making products people want to buy.

The hope is that a separate company might be more nimble. And that, along with better design ideas, better cost structure, and better execution, is what the company really needs. Motorola still seems to be at least one or two design cycles behind its competitors in terms of cool new phones. While its rival Nokia made several handset and service announcements at the GSMA Mobile World Congress in Barcelona last month, highlighting new features like navigation, Motorola had nothing interesting to show at the conference besides a few refurbished handset designs and a rehashed announcement from the Consumer Electronics Show.

Brown acknowledged that new products are key to turning around the handset business. But he said the division needs to be separated to help attract new, top-level talent to lead the recovery. Brown is currently searching for a new CEO to head up the new company.

"We understand that this will be a product-led recovery. And we are taking steps now to ensure and solidify the recovery," he said. "But I think (this announcement) enables the opportunity for us to pick a world-class CEO."

So what about Motorola's brand? Without its brand, many experts say, Motorola's handset division is nothing, simply a collection of has-been and me-too products. Brown recognized the importance of brand and said the company is taking careful steps to figure out what to do next.

"The Motorola brand is strong and trusted and proven," he said. "It's valuable to mobile devices as well as other assets in parts of the business. We will refine the brand strategy in next several months going forward."

But Forrester's Daley believes that keeping the brand with the handset division really is the only viable option the company has.

"Good or bad--Motorola's brand is for mobile devices," she said. "The broadband and mobility solutions unit will have to grow and separate their brand/value from the consumer-device company."