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Motorola considers cell phone biz spinoff

Company says it might consider busting into pieces to revive its ailing cell phone business. But is it the right move?

Maybe Carl Icahn was right about Motorola.

The company, which practically invented the cell phone market in the '80s, is considering spinning off its beleaguered handset business in an effort to revive the business, Motorola said Thursday.

In a press release, the company said it was considering a "structural realignment" to kick-start its mobile-device business, which has seen its global market share plunge to 12 percent from more than 20 percent market share a year ago. The main problem has been Motorola's inability to come up with new handsets to follow the once highly popular Razr.

Last week, the company told investors it would take longer than expected to turn around its troubled cell phone business. And it warned that revenue and market share would likely decline further in the first quarter.

Icahn, the activist investor who has been critical of Motorola's management for more than a year, has encouraged the company to break up, separating the handset division.

"For many months I have been publicly advocating the separation of Mobile Devices from Motorola's other business," he said in a statement. "And I am pleased to see that Motorola is finally exploring that proposal."

Icahn, who lost his bid to win a Motorola board seat last year, said Thursday he still plans to go through with yet another proxy fight this year to win board seats.

"We have previously informed Motorola that we expect to run a slate of directors for the upcoming annual meeting," he said. "And this announcement by Motorola will not deter us from that effort--we believe Motorola is finally moving in the right direction, but certainly still has a long way to go."

Wall Street reacted positively to the news of a possible split in the company and boosted Motorola's share price 10 percent to $12.65 in after-hours trading. But some industry analysts say that simply selling the handset division could be a bad idea for the company, which has spent billions of dollars over the past several years building its consumer brand.

"The question is if you sell off the handset business, what's left?" said Iain Gillott of iGillott Research. "It doesn't make sense for them to have spent so much money developing their consumer brand if they're going to use it to sell set-top boxes and emergency radios."

One-hit wonder?
Four years ago, Motorola struck gold with its popular ultrathin Razr, which launched in 2004. That product helped Motorola increase its market share from 15 percent to 23 percent by the end of 2006. But after the phone became available on all four major cellular networks in the U.S. and the company cut prices, its margins plummeted. Since then, Motorola hasn't found a high-end handset to replace the Razr and boost revenue and profit margins.

While the Razr franchise has been viewed as a tremendous success, executives have been criticized for allowing the product to become commoditized and for not coming up with another hit phone. The company's poor performance ultimately led to the ouster of CEO Ed Zander in November. He was replaced earlier this month with Greg Brown.

Meanwhile, Motorola has tried to revive its lineup of phones. In May it introduced several new products that added functionality such as 3G, or third-generation, network support and multimedia features. But most of the products were nothing more than souped-up versions of devices the company had already been selling.

The final straw seemed to come last week when the company reported an 84 percent decline in fourth-quarter profit, due mostly to sharp declines in its handset business.

The newly appointed Brown further spooked investors by saying during the conference call with analysts and investors that a turnaround of the handset division would "take longer than expected." Motorola had been counting on reviving its handset business in 2008, but Brown said that the division wouldn't likely regain footing until sometime in 2009. The news sent the company's stock tumbling more than 20 percent.

Over the past year, Motorola's market share has steadily been slipping, and by midyear it had dropped from the No. 2 cell phone company in the world to No. 3, ceding second place to Samsung.

Meanwhile Motorola's rival Nokia, which is No. 1 globally, grew its market share to 40 percent in the fourth quarter of 2007 by selling high-end handsets like the N series as well as low-end handsets for the rapidly growing developing market. Not only has Nokia increased its market share, but the company has also boosted profits 44 percent to $2.68 billion.

Faced with such bleak news, Motorola finally seems to be taking bold action to jump-start its turnaround. While more than 50 percent of Motorola's revenue comes from handsets, the company also makes TV set-top boxes and other telecommunications network equipment used in the home. It also makes public-safety radios and handheld devices designed for government and enterprise workers.

Icahn, who has long called for the company to be split apart, says Motorola's stock is undervalued. He believes that splitting the company into pieces would unlock nearly $20 billion in shareholder value.

But some industry analysts caution that such a move could backfire, especially if Motorola sells its handset division without the Motorola brand name.

"The Motorola brand is most associated with the handset business," said Roger Entner, senior vice president of the communications sector at IAG Research. "Fundamentally it's a good business. Of course, management has made some poor choices and there's been poor execution. But without the name, it's not worth much."

As an example of how things can go horribly wrong, Entner points to Siemens' sale of its handset business to the Taiwanese company BenQ in 2005. A year later, BenQ Mobile, which had been set up to handle the brand business, went bankrupt in 2006, and with it went the rest of Siemens handset division.

Entner believes a better strategy for Motorola would be to split into three separate companies, while keeping the Motorola brand associated with the handset business.

"Motorola is a consumer name," he said. "The handset division without the name is Siemens and BenQ all over again. And you saw what happened to them."