Sunday, May 04, 2008

Chicago Tribune: Motorola pressed on date of split

Shareholders asking if spinoff can save handset unit, and when it will happen
By Wailin Wong Tribune reporter
May 4, 2008

In the run-up to Motorola's 2008 annual shareholders meeting, vocal investor Carl Icahn threatened a proxy battle, sued the company, helped persuade executives to pursue a breakup and won two seats on the board.

Those events were just a prelude to the tough stockholder scrutiny Motorola will face in the year ahead as it tries to prepare its ailing cell-phone division for independence. On Monday evening at the Rosemont Theater, Greg Brown will address frustrated shareholders for the first time since becoming chief executive in January.

Investors have watched Motorola's stock sink 45 percent in the last year, hitting a 52-week low in mid-April, and the company's global market share in cell phones has eroded to 9.5 percent from 17.5 percent a year ago. Earlier this month, the Schaumburg-based equipment-maker reported a 39 percent decline in mobile phone revenues from a year ago, and industry data show South Korea's LG could unseat Motorola as the No. 3 handsetmaker this year.

The pressing questions Icahn and other shareholders will pose to Motorola executives are whether Brown's team can save the handset business and when the breakup will take place.

Motorola, having announced in late March that it will split into two independent firms, is under heavy pressure to move quickly.

The longer the company takes to complete the breakup, the less value there is in each of the two stand-alone units—threatening the logic for splitting in the first place. Motorola executives say the process won't be done until 2009. Even if the separation takes place in the first quarter, Motorola still will face half a year of continued losses in revenues and market share because its revamped phone portfolio won't come until early 2009.

"The value of that unit appears to be declining," said Scott Fenn, a managing director of policy at Proxy Governance, a shareholder advisory firm that supported Icahn's nearly successful board bid last year. "I think there are a lot of question marks around the potential value of it now because it really has taken a big hit in recent months."

Brown insists on 2009

Brown insists on the 2009 timeline. In an interview with the Tribune after Motorola's first-quarter earnings announcement April 24, he said the breakup is "a pretty involved process" because of Motorola's large scale. Executives are still deciding the fate of the brand and how to divide up intellectual property.

"2009 is an appropriate estimate," Brown said, although he declined to be more specific. He also had few other details on finding a CEO for the handset division, saying only the search is progressing.

As Motorola's performance slumped over the past year, hurt by its failure to follow the once-mighty Razr with a lineup of successor phones, Icahn pressed for a breakup. The investor, whose stake is 6.3 percent, argued that cleaving Motorola into parts would allow each component to be valued more and create a better deal for shareholders.

Many analysts agreed, saying the mobile division's losses weighed down the other two segments, which make products such as wireless equipment and cable television set-top boxes. Those businesses remain profitable, but their growth was tepid in the first quarter.

"These results throw into question the wisdom of separating the company into two entities," analyst Dave Novosel of Gimme Credit wrote in a report.

Icahn wants to push his own ideas for the turnaround. When Motorola announced its decision to separate, he asked the board in an open letter: "Why will it take you until sometime in 2009 to accomplish the separation? ... Do you intend to carry out your proposals or will it be a repeat of last year's proxy fight strewn with a string of broken commitments?"

Icahn and Motorola agreed in April to have Keith Meister, a managing director of Icahn's investment funds, appointed immediately to the board. The company is also backing a second Icahn ally, William Hambrecht of investment bank WR Hambrecht & Co., for election.

With Meister and Hambrecht on the board, "I definitely would suspect that they would be pushing for [the breakup] to happen this year," said Eric Jackson, who heads an activist investment firm and organized a shareholder campaign against Motorola in 2007.

Shareholder impatience

Employees are likely feeling the same impatience as shareholders, and depressed morale won't help Motorola's mobile division pump out new designs by year's end.

"The longer the deal takes to get announced and the longer they have to sit and agitate, the greater the decrease in productivity," said David Hinkel, a senior consultant at Towers Perrin.

CreditSights analyst Ping Zhao said "the rationale for breaking up is still there," even if the two pieces' individual values are lower than what they were several months ago.

"The bigger issue is, can that [cell-phone] business stand alone?" Zhao said. "What we've said for a long time is that 2008 is pretty much gone for them. The question there is 2009. They keep saying they have new products. Unfortunately, we haven't seen any. ... There is a huge amount of uncertainty about what exactly it will take and how long it will take to turn around that business."

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