MOTOROLA INC.’S INTENT TO SPLIT into two publicly traded companies should speed the recovery of its mobile devices business by attracting new leadership and developing a fresh focus on a product-led recovery, CEO Greg Brown said last week.
And, not incidentally, the announcement may help get investor Carl Icahn off the company’s back, at least temporarily – a point made by observers, but avoided by Brown himself in a conference call with analysts. Icahn has called for the split, but reacted to last week’s news with more criticism of Motorola’s management.
Motorola’s message, in a nutshell: We remain in control of our destiny.
In the analysts’ call last week, however, Brown sidestepped most questions on the branding, capitalization and possible partnering that a standalone device business might need. His stance suggested that the company continued to wrestle with its options and their implications, including not going forward with a split.
Left unsaid: it appeared that no party has come forth over the past 60 days to offer the billions of dollars required for the handset division’s resuscitation, a point Brown was spared from making during the conference call. Whether the company can attract private equity or whether an IPO could raise the necessary level of capital may be hotly debated topics at its Schaumburg, Ill., headquarters.
Brown told analysts last week that an approach to capitalization for the standalone devices business depended on reviews of tax, legal, regulatory and financial issues, which would take months. Ditto whether the Motorola brand would travel with a standalone device business.
“A coherent brand strategy will be undertaken thoughtfully and played out over the next several months,” Brown said.
Thus, Motorola’s announcement may well have been timed to blunt Icahn’s campaign for control of the company in anticipation of its annual shareholders’ meeting on May 5. But the announcement clearly took place well before the company had a firm plan in hand.
Angry Icahn
Icahn, who had called for the split, was not mollified. He promptly responded with a public letter to Motorola’s board that the “much delayed and long overdue” decision to split the company fell short. The investor – who controls 145 million shares or 6% of the company – questioned whether the company would follow through on its decision, why the transformation would take a year and urged it to meet with one of his proposed board members, previously rejected by the company. Icahn’s stance appeared to signal continued acrimony in the run-up to the shareholders meeting.
Icahn’s point about the protracted timeline may get traction among shareholders. Motorola’s competitors in the United States and, indeed, globally, have already been emboldened to take advantage of the company’s weakness and relative lack of new products (though Motorola is widely expected to deliver several new products at this week’s CTIA Wireless 2008).
Market machinations
Motorola still holds a decisive U.S. market share advantage, while globally it has slipped badly.
Motorola held a 32% share in the U.S. market in 2007, according to NPD Group – down more than a point from the prior year. Samsung Electronics Co. Ltd. and LG Electronics Co. hold 17.4% and 16.1% share, respectively, in the United States, with Samsung up 3% from the prior year and LG relatively static. Nokia Corp., which had 10% of the U.S. market last year (down 4.5% from the prior year), has signaled renewed interest in gaining U.S. share, and Motorola’s prolonged turnaround affords the Finnish giant its chance to make inroads. Motorola’s perceived weakness in the smartphone sector – its sole model, the Q, has been tweaked for various domestic carriers – is likely to be exploited by Research In Motion Ltd., the current U.S. share leader in that sector.
Globally, Motorola has dropped from a high of 22% share in 2006 to 12% to 14% this year, allowing Samsung to surge into the No. 2 spot as Motorola faded to No. 3. The laundry list of global competitors undoubtedly will analyze Motorola’s specific weaknesses and feed like sharks on those markets.
With a year already lost – according to some analysts – and another year for reorganization, one and possibly two handset development cycles of 12 to 18 months each will have passed by the time a renewed Motorola device business hits the market with fresh product. Despite a steady release of products, the market awaits a major, post-Razr handset platform that the company can build on for the future.
Meanwhile, Brown acknowledged that the company, facing an uncertain future, could face a further talent drain. But he suggested, contrary to some evidence, that most defections were actually his doing. (Message: We’re still in control here.)
“There’s been an increased level of communication and collaboration and alignment in mobile devices over the last few months,” Brown told analysts. “Having said that, it’s reasonable to expect some changes in a transition. … It’s fair to say that we’ve had changes and they’ve been driven and directed by me.”
Brown said that an executive search firm had been retained to find new CEO candidates and that Motorola sought a “proven leader” with a record of results and consumer electronics expertise, who would likely bring additional talent to the company.
According to Paul Hodgson, who studies corporate governance at The Corporate Library, Motorola’s board will have to submit a detailed proposal for its plan to split in two to shareholders, with a simple majority, or 51%, required for approval.
The intended split is likely to be a topic of conversation at Motorola’s May 5 annual meeting. But the deadline for a shareholder to refer a question for a shareholder vote on the May 5 agenda passed in February. Should Icahn succeed at that meeting in getting his four candidates elected to the company’s 13-member board, however, he might still influence the nature of a split, including the speed with which it is carried out.
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WHAT ANALYSTS ARE SAYING:
● Maynard Um, UBS: “Although we believe a spin(off) will unlock (shareholder) value, we wait for further clarity to determine how much value will be unlocked,” Um wrote last week. Questions remain: Will there be additional costs to a publicly traded company? Will a new CEO change strategy, costing the company even more time?
● Avi Greengart, Current Analysis: Negative on the split, because it signals “no faith” that the division can right itself soon. “Another distraction is the last thing Motorola needs,” Greengart wrote last week.
● Ken Dulaney, Gartner: “Motorola has got to look at its software; its hardware is fine. They’ve got too much going on – Linux, Symbian, Android, Windows Mobile – and the result is that they’re not competitive. At this point, Motorola needs to make some bets – safe bets – and that points to Windows Mobile and Android.”
● Kevin Burden, ABI Research: “The unanswered question is, how will spinning off the handset division help bring its handset business back onto stable ground? Better innovation resulting in handsets that subscribers actually want to buy is ultimately what will improve Motorola’s business – and there is no guarantee that will be the result of this proposed split.”
● Mark McKechnie, American Technology Research: “This move reduces uncertainty for suppliers and personnel and will help attract the right person for the CEO position. This sets the stage for a recovery. Motorola could turn this business around.”
