Motorola should take the hint: Cancel spinoff
October 17, 2008
Hard times in the global economy have battered the cell phone business, giving a certain company in Schaumburg the convenient excuse it needs.
No way should Motorola spin off its handset division next year, as planned. And given all the financial and economic woes in the world, it probably couldn't pull it off—at least not for a good long while.
The spinoff idea came about to appease activist shareholder Carl Icahn, whose $2.3 billion investment is looking worse by the day. Motorola bowed to Icahn in March, agreeing to offload its storied cell phone unit to shareholders after no one would buy it.
Maybe, the thinking went, the company would be better off without a business that had become a money-losing millstone. Maybe the market would value its parts more highly than the whole. And maybe Motorola's steadier business lines, such as two-way radios and set-top boxes, would enjoy financing advantages when detached from the volatile mobile-device unit.
That was a lot of maybes, and maybe that's why the prospects look dicier than ever.
Wall Street has no illusions about the alleged wisdom of this spin, which is vaguely planned for sometime around the third quarter of 2009. "In terms of the long-term viability of the company, I don't see it as helpful," said Matt Thornton, telecommunications analyst at Avian Securities. "There's several things working against them."
For starters, the outlook for mobile phones has gotten dark indeed, as reflected Thursday in lower earnings at rival Nokia. The holiday selling season will be notable for the millions of strapped consumers who decide to hang on to their older phones instead of buying new ones. Similar belt-tightening among governments and municipalities will hurt sales of two-way radios, an under-appreciated cash cow.
When Motorola reports its financial results on Oct. 30, don't be surprised if Halloween comes a day early, despite weak year-ago comparisons.
Second, spinoffs cost money. To make its handset unit viable on a stand-alone basis, Motorola will need to write off a fortune in obsolete inventory. It also needs to recruit fresh talent to compensate for a years-long brain drain and jack up spending on research and development. Chances are the main company will need to guarantee billions in debt for its spun-off offspring. Financing the deal will be no easy task, given the credit crunch.
To top it off, separating mobile devices from the rest of Motorola means divvying up shared suppliers, facilities and intellectual property.
And who gets the brand? The cell phone division absolutely must have it. But the same goes for two-way radios. What cop or fireman wants to rely on a "Moto" radio, or some other perversion of the name?
Motorola stock closed Thursday at $5.61 a share—a market capitalization of less than $13 billion and barely one-fourth of its value a year ago. Sure, practically every stock is down. But not too long ago, this was the most admired company in Chicago. Even after planning to do the spinoff, the stock has fallen. The plan is not clicking.
Yet, Motorola has backed itself into a corner. Over the summer, it recruited a star executive from Qualcomm, Sanjay Jha, forcing Chief Executive Greg Brown to share his title with the promise that Jha would lead the spinoff.
No spinoff, no Jha, at least not for long.
Motorola has stood by the spinoff as the best option for shareholders, but Brown hinted last month that he might slow down the deal. "Given the current financial disposition in mobile devices, we wouldn't separate that business," Brown said. "It has got to get stronger."
Analyst Thornton sees a way to gracefully shelve the deal: "The macro environment does give them an excuse."
So go ahead, Motorola. Take it.