Motorola: Left to Its Own Devices

The equipment maker's inability to find a buyer for its beleaguered cell-phone unit revives the urgency of reforming the division from within

To many the recent announcement that Motorola (MOT) was exploring options for its troubled handset division was seen as a sign the once-legendary business would soon be sold. That seemed a better outcome than, say, a spinoff or internal overhaul for a business mired in losses.

Yet almost a month later, despite rumors of acquisition interest from such heavyweights as Korean electronics maker LG and U.S. PC giant Dell (DELL), bankers, analysts, and industry executives close to Motorola say a sale is neither imminent nor likely. Several Asian handset makers have publicly said they're not interested (BusinessWeek.com, 2/4/08). One banker gives a sale a "50-50" chance, at best.

And while potential buyers may have run proposals by the phone-making giant, none appears willing to offer as much as Motorola's management is seeking. Analysts say the beleaguered business is worth no more than about $8 billion—a far cry from the $10 billion it was once suggested that Motorola might be able to fetch. The lack of acceptable bids has added renewed urgency to Motorola's backup plan: an in-house revamp. Improved performance would help Motorola sell the division at a more attractive price later, spin off a higher-value asset, or even hang on to a revitalized handset maker.

A Fixer-Upper
From early in his tenure, Motorola CEO Greg Brown has given strong signals he's intent on tuning up the cell-phone business. He has taken operational control of the unit, replacing former head man Stu Reed, who has left the company. Those familiar with Brown's plans say he has been weeding out underperforming executives and those he had no hand in hiring. Meanwhile, he's attempting to attract the talent Motorola desperately needs. "He knows what to do to fix this business," says Robert Laikin, CEO of Brightpoint (CELL), a major cell-phone distributor.

Plenty needs fixing. In the fourth quarter, handset sales tumbled 38%, to $4.8 billion, from a year earlier, and the division lost money. Motorola's share of global cell-phone unit shipments dropped from 22% in 2006 to 13.8% last year. Had Motorola found a buyer, "they'd certainly not be selling on a high note," says Todd Rosenbluth, an analyst with Standard & Poor's.

Brown may also need to spend big to ramp up handset production. Mark McKechnie, an analyst with American Technology Research, estimates the company needs to spend $500 million to $2 billion to come out with a new and exciting product line. Adds Motorola shareholder Eric Jackson, president of Ironfire Capital: "The R&D pipeline was really bare [six months ago] and still is." As of December, Motorola had $2.75 billion in cash.

Collaborative Effort
Although a deal isn't imminent, the prospect of a sale or at least a partnership is not dead. Banking sources say major private equity funds, from Blackstone Group (BX) to Silver Lake, are circling the company. And lots of private buyers may be interested. Some Chinese vendors such as ZTE have long wanted to conquer the U.S. market and have talked about cultivating relationships with Motorola. "ZTE often talks with other leading telecommunications manufacturers around potential opportunities for collaboration," ZTE said in a statement. Company officials declined to comment on a potential alliance with Motorola's phone unit.

Motorola told analysts during the industry's big trade show in Barcelona earlier this month that it has two parties interested in the business. Company officials would not specify which, but they acknowledged looking into partnerships as well as a sale. So it's conceivable that Motorola might enter into a joint venture with a company with a proven track record in consumer marketing. Potential partners include LG, Samsung, and even Google (GOOG).

Pressure to Act Fast
Nor is anyone ruling out a spinoff, now or in the future. These kinds of spinoffs are in Motorola's blood: Back in 2004, the company spun off chipmaker Freescale Semiconductor, earning its investors hefty short-term returns. Freescale was later snapped up in 2006 by a consortium of private equity firms. "We think the most likely scenario is a spinoff to shareholders," says Richard Windsor, an analyst with Nomura. "It gives [shareholders] an option to stay or go."

Unfortunately for Brown, many investors are choosing to go. The company's stock is down 30% since the beginning of the year. Most analysts don't expect Motorola to sell more than 30 million handsets this quarter, which would mean even further erosion in share. "They've got to do something quick," McKechnie says. "The asset is deteriorating."

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