Under Pressure, Motorola Breaks Itself Into Two Companies

The company will split itself into two units in 2009, one to handle mobile phones and the other to handle just about everything else.

W. David Gardner, Contributor

March 26, 2008

4 Min Read

With top executives fleeing the company in alarming numbers and billionaire investor Carl Icahn breathing down its neck, Motorola announced Wednesday it will break up the legendary electronics communications company and create two independent publicly traded companies.

The company will create two communications companies in a tax-free transaction in 2009: Mobile Devices, its handset operation, and Broadband & Mobility Solutions, a catch-all entity containing its government and public safety units, telecom gear, and cable set-top receivers. Greg Brown, Motorola's president and CEO, told an online conference of investment analysts Wednesday morning that an executive search company has been interviewing candidates to serve as CEO for the Mobility Devices unit for several weeks.

Motorola's recent phones, like the Rokr E8 pictured here, have not proved as popular as the company's best-selling Razr phones from years ago.

(click for image gallery)

Brown ducked the question when asked whether Icahn, who has been blasting Motorola management and calling for a company breakup, figured in the decision to split the company. He noted Icahn earlier this week had rejected an offer by Motorola to place two directors on the company's board. Targeting Motorola's May shareholders meeting, Icahn has been seeking to place four directors on the company's board.

"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," Brown said in a statement. Motorola stock was up 5% in early trading after the announcement.

Brown also pointed to a top-level Motorola meeting Jan. 31, when the company said it would evaluate "the structural and strategic realignment of its businesses." The company said then that it would consider selling off the Mobile Devices unit, but likely acquirers in the handset business, such as Nokia, Samsung, and LG Electronics, quickly signaled they weren't interested in the troubled unit, which has been losing market share rapidly.

Brown said the management team and board members had been joined by "independent advisers" in evaluating the company; a team of advisers from consulting firm McKinsey has been looking at restructuring Motorola for several weeks, according to media reports.

Founded in the 1920s by two Galvin brothers, Paul and Joseph, the Galvin family held top management positions into 2003, when chairman Chris Galvin left under intense fire from stock analysts.

Motorola had been plagued with a culture of "warring tribes" -- different operating units competing for attention from headquarters -- and Chris Galvin often found himself caught in crossfire between units.

Galvin was replaced in 2003 by Ed Zander, a former president of Sun Microsystems with a strong background in computers but not in the finer points of communications markets. Galvin left behind a design for a handset called the Razr, which rejuvenated sales and profits at Motorola for a while for Zander.

But the company never came up with another hit like the Razr, and the situation deteriorated for Zander. Then Icahn aggressively appeared on the scene, narrowly losing a proxy battle last May when Zander promised to revive the handset operation with a barrage of new cell phones. For the most part, the phones didn't catch on in the face of tough competition from foreign makers such as Nokia and Samsung.

Then Zander came under fire -- the stock analysts again, now joined by an increasingly bellicose Icahn -- until he was replaced last December by Brown, who has a telecom industry background. The management exodus and lackluster handset acceptance have continued under Brown, who needs time to develop and insert new offerings in the product food chain.

Wednesday morning, Brown said Motorola will seek to take advantage of the company's strong brand name. In the future, he said, the company will emphasize its product development. He also is moving to staunch the exodus of key engineers and executives.

The move to break out the Mobile Devices operation is particularly painful for the once-proud company, because it had pioneered the mobile phone business in the first place.

The proposed split isn't unprecedented at Motorola, either: The company spun off its Freescale Semiconductor operation in 2003 and recently was reported to be in serious talks with Nortel Networks about merging their respective wireless infrastructure units with Nortel to operate a merged unit.

The Mobile Devices unit delivers multimode, multiband communications products and technologies, and designs, makes, and sells mobile handsets and accessories.

Broadband & Mobility Solutions designs, integrates, and manufactures voice and data communications systems and wireless broadband networks for enterprises, government, and public-safety users.

Shortly after the announcement, Motorola released a barrage of product and service announcements that cover Mobile WiMax and Long Term Evolution to mobile TV devices and femtocells.

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