Underperformance at Handset Unit Drives Restructuring at Motorola

Motorola has announced its decision to split its business into two separate, publicly traded units. Following the completion of its strategic review at the end of January 2008, the company plans to create two companies based around its Mobile Devices and Broadband and Mobility solutions businesses, respectively. The restructuring, which Motorola plans to complete in 2009, is subject to a number of conditions, including the implementation of inter-company agreements and the filing of the relevant documents with the U.S. Securities and Exchange Commission. Motorola expects that this split will be achieved through a tax-free distribution of shares to existing shareholders.

Greg Brown, the company’s president and chief executive officer, said that the creation of the two units would better position its handset and infrastructure businesses for growth and create value for shareholders through increased management focus and improved flexibility. In reality, however, the weak performance of its handset business was the reason behind the strategic review and decision to split the business. The performance of this business worsened throughout 2007, culminating in a 38% year-on-year (y/y) fall in revenues in the fourth quarter to US$4.8 billion. Between the fourth quarter of 2006 and the fourth quarter of 2007, Motorola’s Mobile Device business moved from an operating profit of US$341 million to an operating loss of US$388 million. A loss of share in the smartphone market to the likes of Nokia's N95 and Apple's iPhone, as well as a move into high-volume but low-margin markets, were the main reasons for worsening revenues and profitability. While Motorola has been seeking to enrich its handset portfolio (see Outlook and Implications), which is overly reliant in the RAZR model, such efforts will take a time to translate into improved financial performance. As it is, Motorola’s handset business has dragged the company into loss: the company’s other businesses are performing well.

Outlook and Implications

• Shareholder Pressure Drives Split: The decision to split the company in two is the latest chapter in a long-running battle over company strategy, which since July 2007 has included the reorganisation of the business into three units (see World: 18 July 2007: Motorola Reorganises Business Divisions) and the resignation of former chief executive officer Ed Zander (see World: 3 December 2007: Icahn Presses the Advantage as Motorola Chief Executive Steps Down). At the centre of the battle is billionaire investor Carl Icahn, who is currently demanding increased disclosure on Motorola’s handset business and has called for even more radical restructuring of Motorola’s business. In December 2007, he remarked that: “In my opinion, Motorola should be split into separate companies: a mobile devices company; an enterprise mobility company; a connected home company; and a company focused on mobile networks infrastructure”.
• Will the Split Work?: Icahn’s determination to see more documents relating to Motorola’s handset business suggests that, in his view, the unit's problems run deep and may not be resolved through the split alone. Motorola is seeking a new broom for the unit and already has a number of initiatives in place with the aim of improving performance. For instance, it has been refreshing the user interface, which was one of the key points where it historically fell down. The new Linux-based interface and the deal to acquire 50% of Symbian-based OS UIQ will help but it will take some time to shake off the legacy of its previous interfaces (see World: 16 October 2007: Motorola Buys 50% of UIQ Operating System from Sony Ericsson). However, irrespective of whether Motorola’s mobile handset business is split off or integrated with Motorola’s other units, there is no guarantee that these efforts will work. Competition in the handset space remains intense and Motorola is far from alone in struggling to combine the requirement to produce high-end phones with the need to capture the low-end emerging markets opportunity (see World: 29 February 2008: Q4 2007 Mobile Handset Update). In the past few months, Mitsubishi said that it would exit the handset market (see World: 3 March 2008: Mitsubishi Electric to Exit Mobile Handset Business) and Sanyo has also sold out to Kyocera (see Japan: 21 January 2008: Kyocera to Acquire Sanyo Mobile Handset Business).
• Reversal of Convergence: The split-up of Motorola would also appear to go against the long-term strategy among vendors towards convergence. The confluence in the long term of mobile access with digital entertainment and computing would suggest that businesses such as Motorola would benefit from a closer relationship between network and device businesses. Ultimately, though, Motorola needs to get back to delivering handsets that are as usable and attractively priced as its those supplied by competitors Nokia and Sony Ericsson.