Motorola to Split Into Two After Phone Sales Slide (Update5)

March 26  -- Motorola Inc. plans to split into two companies next year amid pressure from billionaire investor Carl Icahn to break off the money-losing mobile-phone business that it pioneered 25 years ago.

One company will focus on handsets and the other will sell network equipment, cable TV set-top boxes and two-way radios -- businesses that are profitable and growing faster. The board is looking for a new chief executive officer for the phone business, Motorola said in a statement today.

The decision buys time for Chief Executive Officer Greg Brown to revitalize the handset unit before the split. Icahn has said the division is undervalued and demanded that it be separated with new management. Before today, Motorola stock had fallen 56 percent in the past two years as customers snapped up phones from Apple Inc. and Nokia Oyj.

``If they had been forced to sell it off, shareholders would have been forced to accept a bargain basement price,'' said Richard Windsor, a Nomura International analyst in London who recommends holding on to the stock. The move is ``the one that makes the most sense for shareholders.''

Brown said on a conference call that he and Chief Financial Officer Paul Liskawill stay with the network equipment business. Schaumburg, Illinois-based Motorola said it wants the split to be a tax-free way to create two independent, publicly traded companies.

Stock Gains

Motorola rose 13 cents to $9.89 at 12:07 p.m. in New York Stock Exchange composite trading.

Icahn didn't return a call seeing comment. He owns about 6 percent of Motorola's stock and is the No. 2 shareholder.

Motorola lost market share in phones last year after failing to come up with a hit successor to its Razr, which created the category of slim phones when it was introduced in 2004. The Razr, which initially sold for $500, lost its cachet. While all its main rivals boosted sales in the fourth quarter, Motorola's phone shipments plunged 38 percent.

The breakup will accelerate a recovery in the handset business and provide ``clarity of direction'' for customers and employees, Brown said. The company said on Jan. 31 that it would consider splitting off the unit.

`Unique Product'

``The Razr was so successful as a unique product that it masked a lot of the underlying problems,'' said Michael Walkley, an analyst at Piper Jaffray & Co. in Minneapolis. ``Once Razr sales started to fade, their cost structure wasn't competitive, especially now that they don't have the right products for the market.''

Motorola would be valued at about $8 a share without the handset business, American Technology Research analyst Mark McKechnie in San Francisco said today in a note. Brown wouldn't comment on the market value of the phone unit.

``Each company would benefit from improved flexibility, a capital structure more tailored to its individual business needs and increased management focus,'' said Brown, who took over after Ed Zander stepped down at the start of the year.

He declined to comment on the effect on earnings or what will happen to the Motorola brand name. Motorola has shed businesses in tough times before, including its Freescale chip division in 2004.

Handset Losses

The handset business lost $388 million last quarter. The networks and set-top box unit had a profit of $192 million on 11 percent sales growth, while the unit making radios and scanners had a profit of $451 million and a 35 percent revenue increase.

Motorola made 19 acquisitions in two years to bolster the units. Its purchase of Symbol Technologies Inc. last year for $3.9 billion made it the biggest seller of handheld scanners with built-in computer features to track goods.

Apple stepped up competition in handsets with the introduction of its Web-browsing iPhone in June. The company sold 2.3 million of the devices in the holiday quarter. Motorola's Razr sequel sold 1.5 million units in that period.

``Software is becoming more important in the mobile-device business,'' Brown said in an interview, referring to applications such as Web browsing, mapping and music. ``We have traditionally been strong in design as a corporation and quite innovative. I think that innovation needs to extend itself into broader experiences and consumer applications.''

DynaTac

Motorola started selling the world's first commercial mobile phone, the DynaTac, in 1984, after gaining regulatory approval for the device the year earlier. It created the first prototype for the product in 1973.

The phone acquired further cachet in 1987, when fictional financier Gordon Gekko, played by Michael Douglas, used it to make deals in the movie ``Wall Street.''

In 1996, Motorola introduced the $1,000 StarTac, among the first handsets to flip fully open. After its appeal faded, the company lost its No. 1 position in 1998 to Nokia, whose candy- bar-shaped phones won over customers in Europe and Asia.

To revive sales, Motorola brought in Zander in 2004. He introduced the Razr later that year.

The device, which sold more than 110 million units, helped Motorola cement its position as the second-largest handset maker and fend off Asian competition until last year. Samsung Electronics Co. took over the No. 2 spot from Motorola in the second quarter with its sleek Sync and BlackJack devices. Sony Ericsson Mobile Communications Ltd. may steal the No. 3 position this year, demoting Motorola to fourth, analysts say.

Microsoft catches social networking religion. And most folks are wondering where Facebook will land in this mess. The larger question: Is there a business hook here somewhere?

Yup, I hear the crickets too.

Social networking remains a consumer thing. And to the blogosphere it’s an opportunity to work in a Mark Zuckerberg quip, toss in Google as a reference and navel gaze a bit about the “conversation.”

But there has to be a corporate use in here somewhere.

Tuesday’s news that Yahoo is supporting OpenSocial and Google is stepping away to assure “neutrality” and interconnect social apps is a big deal. OpenSocial can now forge ahead as a real standard. Meanwhile, Microsoft has also entered the social network standard game (boy this all sounds familiar after awhile) and launched its own initiative. The gory details are fortunately rounded up by Techmeme.

I can’t help but think that this neutral OpenSocial foundation is a good thing for the enterprise. Perhaps enterprise apps will hook into OpenSocial. Perhaps vendors–beyond Oracle and Salesforce.com–will flick to the effort. Perhaps corporations will become more social.

Until then, however, there isn’t much of a huge plan when it comes to businesses.

Last week, I spoke to Joe Kraus, Director of Product Management at Google, about the enterprise implications of OpenSocial. Even though OpenSocial will be “forever free and open” there’s a lot of work to do before this becomes even slightly interesting to the enterprise.

Among the highlights of my conversation with Kraus:

• Social networking is the new black. Most killer apps are social by nature–email, IM and photo sharing for instance. Companies have been slow to adopt these uses–beyond email of course.
• Social networking isn’t a destination site. It will branch out through the entire Web. How will corporations handle this branching out process?
• Enterprises will adopt social standards like OpenSocial to embed third party applications. The rub: “These applications will need policies around them,” says Kraus. Simply put, a lot of social applications are frivolous–throwing sheep, awarding virtual beers (what’s the point folks?) and poking people. Surely, there’s a business function here somewhere.
• How do you tighten up social applications? “Social applications are loose in consumer land,” says Kraus. “We expect them to become much tighter in enterprise land.”
• What’s the model? Consumer social applications are built around advertising. In the corporate world that model won’t fly. What exactly will corporations license?
• Whatever develops in the socialprise will begin with CRM. “Salesforce and Oracle both see the opportunity, but CRM is a social application to begin with,” says Kraus.