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Wednesday, March 26, 2008

Motorola Renews Itself by Spinoff

While Motorola is in disarray as a result of its split into separate companies, Nokia and Samsung will be able to grab market share, analysts agree.

"The short-term winners will be Nokia and Samsung, and maybe Sony Ericsson will be able to increase its market share as well," said Leif-Olof Wallin, research vice president at Gartner.

Ben Wood, director of research at CCS Insight, agreed. "With any change there is some disruption, and competitors can grab market share before it stabilizes," said Wood.

Before the split was announced Wednesday, he wrote in the company blog that Motorola competitors would use CTIA Wireless, next week's big telecommunication conference in Las Vegas, to take advantage of Motorola's woes to increase their share of a highly competitive market.

But in the longer term, Motorola can stage a comeback, according to Wood. "The bad news is that Motorola has the wrong products, the good news is that can be changed," he said Wednesday, after the announcement.

He still sees strong fundamentals in Motorola. It has a strong brand and presence in important markets like China and India.

Also, a third major vendor in the market is needed to keep Nokia and Samsung in check. "It's needed to provide some balance with Nokia. A Nokia-Samsung duopoly isn't good for anyone," said Wood.

The Motorola split is a result of its under-performing mobile phone division. During last year, it fell from second to third place, with Nokia in first and Samsung in second in the fourth quarter, and its market share decreased from 21.1 percent to 14.3 percent, according to Gartner.

Gartner's analysis of what happened is that an unspecified deal with an unnamed Asian vendor fell through and as a result, Motorola decided to go ahead with the split.

"We think it was ZTE, which still can become a force in the new company," Wallin said.

He also notes that Nokia is the only Western mobile phone vendor that has been able to compete with Asian manufacturers. Along the way, Siemens and Alcatel have disappeared, and Sony Ericsson is 50 percent Japanese,


Motorola has taken heed of pressure from shareholders including billionaire Carl Icahn, and announced it will spin off its mobile handset business.

Motorola (nyse: MOT - news - people ) shares rose 1.5%, or 15 cents, to $9.91, on Wednesday morning, after a pre-opening rally of over 9.0%.

The changes will be made in 2009, under which two publicly-listed companies will be created, one focusing on mobile phones and the other bringing together Motorola's home and networks business, which sells TV set-top boxes and modems, and its enterprise mobility unit, which sells computing and communications equipment for businesses.

Motorola expects the transaction will be tax-free, allowing shareholders to own stock in both the new companies

Nomura analyst Richard Windsor said this represented the best deal for shareholders. "It is the least disruptive remedy to their recovery plan for their mobile phone division," he added.

He said the company would have struggled to get a good price if it had chosen to sell its mobile handset division, which has suffered from a slump in sales thanks to stiff competition from the likes of Nokia and Sony Ericsson.

"Our decision to separate our Mobile Devices and Broadband & Mobility Solutions businesses follows a review process undertaken by our management team and board of directors, together with independent advisors," Chief Executive Greg Brown said in a press release.

"Creating two industry-leading companies will provide improved flexibility, more tailored capital structures, and increased management focus - as well as more targeted investment opportunities for our shareholders."

Motorola launched a strategic review in January, following a weak set of fourth-quarter earnings that were weighed down by troubles at its handset business, which has failed to repeat the success of its Razr phone.

Just ahead of the announcement, UBS analyst Maynard Um cut his estimates for sales of Motorola handsets for 2008, by 9.0%, to 146.5 million, despite Motorola's plans to launch several new 3G phones and low-cost handsets targeted at emerging markets.

Icahn had pressed for the spin off and for the appointment of a new chief executive for the division, arguing that the company functioned as a conglomerate, and a carving off the handset unit was in the best interests of shareholders. (See: " Icahn Rattles Motorola")

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