Mobile Unit Sale Contemplated by Motorola

In a brief announcement, Motorola has issued a press release stating that it is "exploring the structural and strategic realignment of its businesses to better equip its Mobile Devices business to recapture global market leadership and to enhance shareholder value. The company's alternatives may include the separation of Mobile Devices from its other businesses". Greg Brown, the president and chief executive officer at Motorola, stated, "We are exploring ways in which our Mobile Devices business can accelerate its recovery, and retain and attract talent, while enabling our shareholders to realise the value of this great franchise.”

Further developments will not be discussed until the board of directors has approved a definitive transaction or the process is complete, although there are no guarantees that a transaction will occur.

Motorola’s Previous Performances

Motorola suffered a fairly disastrous year in 2007, caused by falling sales by its handset division, the largest unit of the company, which had previously ridden a wave of consumer demand for the fashionable slim-line RAZR handsets. As competitors caught up and introduced their own slim handsets, the RAZR lost its edge from around the fourth quarter of 2006, when expected sales targets were missed, before falling precipitously in the first quarter of 2007. Even as sales and revenues boomed in 2006, a strategy of increasing market share by lowering margins pressured profits and ultimately, it seems, took away some of the allure of the handset range as a fashion item (see World: 5 January 2007: Motorola Misses Q4 Mobile Device Targets and United States: 22 January 2007: Sales Grow as Profits Halved for Motorola).

Motorola spent much of 2006 and 2007 building up other segments of its business, such as acquiring Symbol Technologies to beef up its enterprise segment, and adding to its home-networking capabilities with the acquisition of set-top vendor Kreatel (see World: 20 September 2006: Motorola to Buy Symbol Technologies for US$3.9 bil. and Global: 18 January 2006: Motorola Acquires IP TV Set-Top Vendor).

In 2007, it particularly built up strength in video networks by acquiring Broadbus, Vertasent, Tut, Terayon, and Modulus—bringing product portfolios and strength in hardware, encoding, and software capabilities to deliver video systems that minimise bandwidth use and add functionality important to broadcasters/video service providers, such as advert insertion, regionalisation, and personalisation of content (see World: 24 April 2007: Motorola Acquires Video Software Company for US$140 mil.; 22 December 2006: Motorola Acquires IP TV Co. Tut Systems for US$39 mil. and 26 September 2006: Motorola Continues Acquisitions with VoD Company Vertasent). While this helped to quickly build a portfolio of industry-leading products, this string of acquisitions could be taken to indicate a lack of internal development capabilities.

Outlook and Implications

Indeed, the prospective sale of the Mobile division risks being seen as an admission that the company also lacks innovative ideas in this area—the press release for the move notes that selling the unit would help "accelerate its recovery, and retain and attract talent", with the thinking presumably being that a split would help it to focus on core operations by each segment. However, Motorola would have become aware of the need to refresh its handset portfolio at the end of 2006. If it had responded effectively then, resultant product innovations should be set to hit the shops in 2008. Motorola has also made a number of moves in recent months that still need to filter through product development, such as improving the operating system and user interface through purchasing 50% of Symbian OS UIQ (see World: 16 October 2007: Motorola Buys 50% of UIQ Operating System from Sony Ericsson). A sale is therefore something of a 'nuclear option', leaving a potential buyer to benefit from these moves and stripping the possibility of the synergies between the units. Crossover points, such as mobile computing in the enterprise mobility division, and facilitating fixed–mobile convergence, exist. Creating seamless experiences by utilising its growing set-top box presence could prove a long-term winner that would be sacrificed in order to create short-term shareholder value—if Motorola has the vision to leverage these synergies. With the market currently in a weak state, the short-term value that would be created by a sale is also likely to be less than may be hoped for.

Looking at who may be interested in Motorola's mobile unit, the private equity boom of last year has been quashed by the ongoing credit crunch, which, barring cash-rich sovereign funds on the hunt for a bargain, likely eliminates a whole stratum of potential bidders. Several companies remain possible interested parties, but their interest is likely to be tempered by Motorola's performance, which, although bottoming out, still languishes, while current market conditions also remain unfavourable.

Direct competitors in the mobile industry are possible interested parties, but would have little to gain—with their own development teams and product portfolios competing increasingly well against Motorola, they would likely be adding little more than a brand and handset range. Speculation can be expected to take in Apple, which would be able to bring its design flair in both the user interface and industrial design, marketing capabilities and a range of products that include set-top boxes (for that seamless mobility experience) and, since last year, mobile phones. However, while such an acquisition would provide a massive boost in the mobile device market, Apple has so far marketed itself on exclusivity and would be unlikely to wish to potentially devalue the brand (though co-branding could be an option) or mark a move into the lower margins of the mass market.

Dell has also reportedly been sniffing at the foothills of an entry into the mobile device market, having sold PDAs using Windows Mobile under the Axim brand. Dell hired the ex-Motorola head of mobile devices, Ron Garriques, in February 2007. Rumours have also been indicating that Dell is building a mobile phone using the Google Android platform, but with little strategically to offer, Dell is a highly unlikely player for Motorola's handset unit.