Calling it a “step in the right direction”, billionaire investor Carl Icahn, who has a 6.3 per cent stake in Motorola, recently announced the company’s decision to split into two companies ?? one focusing on the mobile phone business, and the other on the more profitable mobile enterprise and broadband business.
The separation of the two businesses, to be effected by 2009, follows last year’s decision to streamline operations. It started with the axing of 7,500 jobs and saving $1 billion in costs. The latest decision follows a management review done in the beginning of 2008. Motorola officials believe a split will allow the company to focus more on the loss-making cellular phone operations. Motorola’s worldwide market share in the handset market has plummeted from 22 per cent to 12 per cent. In India too, Motorola has not been performing well in the handset segment despite having some of the cheapest products in the market. Industry estimates place Motorola’s market share in India at 14 per cent in December 2006, which has now slipped to 6.5 per cent. The mobile phone division’s woes are also depressing the company’s stock which has been on a 15-month slide.
While spin-off strategies often prove successful, the industry seems to be divided on this one. While some are sceptical of the move saying that the handset unit still lacks products that can help the company regain market share, others contend that the spinoff will work by allowing an increased focus on the company’s core business.
The rationale behind such a move is that shareholders get more value from a company in pieces than they do from the company as a whole. Motorola itself offers a good example. In 2003, the company decided to spin off its loss-making and also highly volatile semiconductor business into a separate company, Freescale Semiconductor. Freescale’s stock more than doubled between the time it went public in 2004 till it was acquired in 2006 by private investors. Meanwhile, Motorola’s stock rose about 50 per cent during roughly the same time.
Post-split, Motorola’s handset division may have an Indian owner. The consumer durables major Videocon, which recently received a pan-Indian licence to provide telephony services, has put in an expression of interest to acquire Motorola’s handset business. As reported to the press, Videocon’s chairman, Venugopal Dhoot, stated, “While we are firming up plans for the cellular services business, we are already present in the frontend of the play through our retail business. So, we need a mobile phone supplier to complete the chain.”
While Motorola pioneered the mobile phone business 25 years ago, over the years, it has lost out to competitors like Apple, Samsung and Research In Motion. Market leader Nokia has remained practically unassailable across the world.
Purchasing Motorola’s handphone business, which has its facilities in China, Taiwan and India, is likely to help Videocon leapfrog Sony Ericsson to become the world’s third largest maker of mobile phones. In India too, Motorola has a handset manufacturing facility in Chennai where the company makes both CDMA and GSM mobile phones.
Merrill Lynch estimates Motorola’s handset business at $3.8 billion. Analysts are concerned about the viability of acquiring the business at a steep price in a market where profit margins are very thin. Moreover, for Videocon, raising funds could be a challenge. However, according to Dhoot, Videocon has a strong balance sheet because of its oil and gas business. “It has around Rs 20 billion cash on its balance sheet and raising debt will not be so difficult,” he says.
