Motorola: The end of an error

Roger O. Crockett/BusinessWeek
08 Feb 2008
00:00

For connoisseurs of American electronics, Jan. 31 marks what may become the end of a technology icon. Motorola (MOT), the largest and most successful cell-phone manufacturer in the U.S., announced it's considering separating the cell-phone division from the rest of its businesses, possibly through a sale.

The company had to say there's no assurance a transaction will occur, but the statement from recently appointed Chief Executive Greg Brown reads like a fait accompli. 'We are exploring ways in which our mobile devices business can accelerate its recovery and retain and attract talent while enabling our shareholders to realize the value of this great franchise,' Brown said.

The fact is, Motorola management has been unable to speed up the recovery under its current structure. It's just not clear whether Motorola would sell the cell-phone unit or spin it off to shareholders. The company said it won't discuss the options under consideration until the board of directors picks one. Meantime, in a bid to shore up the handset business, CEO Brown will assume direct responsibility for the mobile devices unit, effectively demoting the division's current president, Stu Reed, BusinessWeek has learned. Reed will remain at Motorola for now, but the cell phone division's lieutenants will report to Brown, according to a memo that was circulated to staff on Feb. 1.

Failed profitability attempts

Motorola has been under immense pressure to fix its ailing mobile devices business, which tumbled last year from No. 2 in the world behind Nokia (NOK), to No. 3 behind Samsung Electronics"”failed to produce a best-selling phone that could match the allure of the Razr, which debuted in 2004. Revenue has dwindled and losses mounted, causing shares to lose 42% of their value over the past year.

Wall Street battered the shares again last week, when Brown acknowledged in an earnings conference call that a recovery in the cell-phone business isn't likely until next year at the earliest.

In a desperate attempt to cut costs and return to profitability, Motorola has axed thousands of engineers and managers. Now, 'they are acknowledging this is a pickle they're in,' says Mark McKechnie, an analyst with American Technology Research. 'They have the core technology, but they don't know how to run a handset business. Some of the best engineers on the planet left in the recent cuts.'

Investors including Carl Icahn, dismayed by the company's worsening performance, advocated for a spin-off of the phone unit for nearly a year (BusinessWeek.com, 5/7/07). 'I am pleased to see that Motorola is finally exploring that proposal,' Icahn said in a statement. Icahn has also said he believes the cell-phone division could sell for about $20 billion, roughly the amount of the unit's annual revenue.

Possible suitors

The prospect of a sale has analysts placing bets on which company, if any, would be willing to buy a handset business with such serious problems. The unit has negative margins; scant toehold in the sizzling market for third-generation phones that download photos, videos, and other data at high speeds; and consequently, diminishing market share.

Still, it's not out of the question that one of Motorola's chief rivals could pounce.

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