Could Motorola break into four units next year?

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Could Motorola break into four units next year?

By CAROLINE GABRIEL

Published: 11 December, 2009

READ MORE: M&A | US | Motorola | Android

Break-up talk is swirling around Motorola, more seriously than at any time since it put the spin-off of its handset division on hold a year ago, to focus on turning the ailing company around. With optimism for a recovery in the cellphone business growing, there is rising market sentiment that the time is now right for the firm to separate into two companies - or even four.

Motorola stock leapt from $8.20 to $8.60 yesterday when Bernstein Research put out a research note, predicting that the company would be split in four next year. Analyst Pierre Ferragu said Motorola is "a combination of four business entities with no synergies" - the quartet being home networks, wireless infrastructure, enterprise mobility, and of course the still troubled handset unit.

Last month, the Wall Street Journal cited "people familiar with the matter" who said that Motorola was looking to sell off the home and networks mobility business for about $4.5bn, talking to private equity firms and rival vendors. This would reverse the original strategy of spinning off the devices business to add value to the remaining operations, but would keep the current home and networks products in a single unit covering carrier systems to set-top boxes. Ferragu argues that these would be better off apart and this would generate more value for each component since their synergies are limited.

He names Ericsson as the most likely bidder for the carrier business, a deal that would strengthen the Swedish leader's newly powerful north American position still further, hard on the heels of the purchase of Nortel assets. Motorola would bring Ericsson some additional presence among CDMA carriers plus an increased presence at Sprint and some advanced TD-LTE developments. However, now Ericsson has Nortel, it does not seem that Motorola's assets would be so valuable to the market leader to justify a high purchase price, and the larger firm would be uninterested in a key element of the Motorola product line, WiMAX.

For home networks, other speculation has centered on a private equity purchase, or a bid from Cisco/Scientific Atlanta, Samsung, Huawei or Pace Micro. In some ways, the enterprise mobility unit, largely based around the acquisition of WLan maker Symbol plus government products, would be an easier sell - it lives in a market that still has considerable buoyancy, has a more coherent range, and has been keeping Motorola afloat with its profits. However, it did struggle in the last quarter, seeing its revenues drop 13% to $1.77bn, and profits down from $403m a year earlier to $306m. Again, Cisco would be the logical buyer to extend its dominant market share still further.

So what of the handsets? This division could still be floated separately, rather than sold, riding on the high hopes for the new Android oriented strategy and the good impact of the new Droid/Milestone and Cliq/Dext smartphones. Co-CEO Greg Brown said recently that he remains committed to spinning off devices eventually. Ferragu says this unit is worth around $1.80 to $3 per share, and might be attractive to other handset makers, including Sony Ericsson. The synergies between the fourth and fifth phonemakers are clear - merger would give them both the scale that is increasingly vital to be competitive, as both slip further behind the big three (Nokia, Samsung and LG). And they have complementary strengths, even as both are focusing on Android for 2010, with Motorola still most powerful in north America, where Sony Ericsson scarcely makes an impact, and SEMC being European focused and benefiting from the Sony brands. However, the demands that the joint venture already makes on its Swedish and Japanese parents could make an acquisition a step too far.

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