AS WORD SANK IN that Motorola Inc. is “exploring the structural and strategic realignment” of its business – including the possible creation of a standalone company for its devices business – attention has turned to the company’s strategy, its actual value and potential outcomes.
Strategically, recently installed CEO Greg Brown appeared determined to get ahead of the rumor mill, which last week had Moto selling its device business outright, and possibly signal to potential investors that it was open to a deal.
Current investors sent Moto’s stock up more than 10% on the news that a decisive solution might be at hand. And investor Carl Icahn, famous for profiting from the sale of under-performing companies’ assets and one of Moto’s largest stockholders, told The Wall Street Journal that he will mount a campaign to obtain four to five seats on the company’s 13-member board at the annual stockholder meeting this May. Icahn failed to gain a seat on the board last May.
Troubles run deep
Brown’s announcement also reflected that Motorola’s troubles are deeper than generally acknowledged by the company or analysts. The company has not revealed a follow-on platform to its Razr handset, it missed the global ramp in 3G devices, its smartphone offerings are minimal in a profitable growth area, it made a failed attempt to chase Nokia Corp. in global market share, and has been slow to reveal the depth of its woes.
Brown took over as CEO on Jan. 1 from Ed Zander, who will undoubtedly be remembered for riding the profitable Razr wave to its height, then driving the company into the ground without a workable approach to the future. Future case studies may well see Zander’s tenure as a classic profile in executive hubris.
One possible upshot missing from the issue: The U.S. handset market, which Motorola has dominated with about 36% share, is likely to now be in play.
A market in flux
The turn of events also reflected that the traditional wireless handset business – indeed, the entire wireless landscape – is now in upheaval with Nokia achieving 40% global market share in handsets, Motorola plunging from about 24% share a year ago to half that today, and new market entrants such as Apple Inc. and Garmin Ltd. targeting the profitable high-tier. Add the increased interest in wireless by computing and Internet giants such as Google Inc., Microsoft Corp. and myriad others, along with participants in the ongoing 700 MHz spectrum auction, and “flux” becomes the operative word.
According to analyst Tero Kuittinen at Avian Securities L.L.C., Motorola’s timing – at a point where it is expected to produce a follow-on to the Razr platform – may show serious problems with the presumed new platform. Otherwise, the company would hold out for more time and obtain a better value for a piece of its core business, he said.
“If Motorola really intends to spin off or merge the handset unit before the impact of the next phone platform is evident, it implies that something has gone awry with the new line,” Kuittinen wrote in his RealMoney.com column.
“Has the messy legacy software that Motorola has been keeping together with bubblegum and paper clips finally buckled under the weight of the new complexity of next-gen features like touchscreens and advanced video?
“It’s great that Motorola is taking drastic action to fix the company, but it’s chilling to see that they may intend to find the market price of the phone unit at this particular product cycle point,” Kuittinen wrote.
Moto’s price tag
Analysts attempted to gauge Motorola’s value without its bread-and-butter handset division and at least one calculation provided a stark view of Motorola’s challenges and, indeed, the entire handset industry.
A decision must come swiftly, said analyst Mark McKechnie at American Technology Research, due to the possible defection of key employees and suppliers, strained carrier relations and damage to its brand.
McKechnie said in a research note that Motorola’s handset “hole” would likely persist into 2009 and he applauded the company’s decision to review its options. Investment on the scale of $500 million to $2 billion would be required for a handset turnaround, the analyst said. Nokia, McKechnie noted, controls 40% of the market and 70% to 80% of the market’s profits, with double the margins of its next-closest competitor, Samsung Electronics Co. Ltd. According to McKechnie, $8 billion would a generous price for Moto’s handset business; implying that any party seeking a joint venture might have to pony up about $4 billion.
Analyst Maynard Um at UBS Investment Research said that UBS’ international team of analysts could not envision any current handset company, including cash-rich Chinese companies, actually buying Moto’s handset division. Um said in a research note that if Moto creates a standalone company, the impact on its suppliers might be minimal, but the impact of an outright sale would depend on the purchaser.
JV? Private equity?
Kuittinen agreed that an outright sale was unlikely, but that a joint venture, perhaps with private equity, might be workable. Kuittinen pointed to Sony Ericsson Mobile Communications as an example of a joint venture that wedded two struggling device businesses and, after a difficult adolescence, became a profitable player.
“I’m sure they (Motorola) are also considering ditching their ‘connected home’ business,” the analyst said.
Motorola’s mobile devices business, which typically has generated more than half the parent company’s revenue and profit – and is most closely tied to the company’s identity – has also contributed the lion’s share of the company’s recent woes. Motorola reported Jan. 23 that it had an 84% drop in net income in the fourth quarter and expected a first-quarter loss. The device business saw a 38% drop in revenue over the year-ago quarter and its market share flagged to 12% from nearly double that a year ago.
The company’s stock has lost 33% in value in the past year, according to The Wall Street Journal Online.
