The Wall Street Journal-20080201-Motorola May Spin Off Handset Unit- Icahn Looms

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Motorola May Spin Off Handset Unit; Icahn Looms

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Motorola Inc., facing pressure from activist shareholder Carl Icahn, said it may spin off or sell its flagship handset division.

The decision is a stunning setback for an American technology icon and offers a parable for other industries. Motorola essentially created mobile telecommunications with the earliest mass-market hand- held radios. But it repeatedly stumbled in keeping up with consumer demand for innovation, while foreign competitors stole away market share.

Motorola produced a series of hits that changed the industry with models such as the StarTAC, an early flip phone from the 1990s, and the ultraslim Razr in this decade. But the company has long struggled to fill in the gaps between hits, and in the past year, Motorola's market share has been cut in half, to its lowest levels since 2001. Last week the company said it couldn't predict when it would halt its market-share slide, sending its stock plunging 19%.

Yesterday's news of a possible spinoff or sell came after the close of regular market hours, and pushed Motorola shares up more than 10% in after-hours trading.

Motorola's decision comes as the mobile-device market -- which shipped 1.1 billion units globally last year -- is undergoing sweeping change. Consumers are demanding easy-to-use devices with Internet and multimedia capabilities. Mobile use of the Web is expected to grow even faster in coming years as carriers increase the bandwidth of their cellphone networks by adding new radio spectrum.

Manufacturers are under heightened pressure to come up with sleek products, particularly after Apple Inc. entered the market last year with its touch-screen iPhone. The latest phones come ready to surf the Internet at high speed and feature software to download driving directions, watch video, share photos with friends and connect to Web- based social networks. New players such as navigation specialist Garmin International Inc. are entering what's already a crowded market.

Motorola has a new chief executive, Greg Brown, who took over from Ed Zander at the start of this year. Mr. Brown must figure out how to deal with Mr. Icahn, who has been pushing for a breakup of the company. The investor said yesterday he plans to mount a new proxy campaign to win four or five seats on the company's 13-member board at the annual shareholder meeting this spring. Mr. Icahn unsuccessfully sought a board seat last year.

Last night, Mr. Icahn said Motorola's announcement wouldn't change his intention to get board seats. He said he has been buying more Motorola shares lately, but wouldn't quantify his current holding. As of Sept. 30, he owned 3.3% of Motorola's stock, according to FactSet Research Systems Inc.

"We think they are moving in the right direction, but they still have a lot of moving to do," Mr. Icahn said, noting that he wants new management at the handset division.

Motorola's handset business accounts for about half of the company's annual sales of $36 billion. Carving off handsets would leave Motorola with its home and networks division, which makes TV set-top boxes and telecommunications-network gear, as well as its enterprise and government business which makes public-safety radios and hand-held devices for workers on the road.

Mr. Icahn argues that these two businesses alone are worth more than Motorola's market capitalization of around $26 billion. He thinks the cellphone division could fetch $20 billion and leave shareholders with a more profitable company.

Don McLellan, senior vice president of corporate strategy at Motorola, agreed that the "current stock price dramatically undervalues" the mobile-devices division. He said Motorola will take an "open-minded fresh look" at its handset business. While a sale isn't "preordained," he said, carving out the business "could well drive the recovery that we've been talking about."

Motorola itself "is not for sale," Mr. McLellan emphasized. Motorola hasn't held discussions with potential buyers so far, people familiar with the matter said.

Analysts said Motorola might get a better deal by teaming up with an Asian company instead of selling its handset division outright when the market is weak. "To partner, where Motorola has skin in the game -- that would make the most sense," said J.P. Morgan analyst Ehud Gelblum. Mr. Gelblum thought a tie-up could make sense for big Korean handset makers Samsung Electronics Co. or LG Electronics to better compete with market leader Nokia Corp. Both already have major U.S. presences. He said Japanese companies that have had mixed success outside of their home market also might be interested.

The business's current problems are sure to be an issue for prospective buyers. Motorola has warned that handset sales would drop more than the 15% that is normal for the post-holiday period. It suffers from a weak lineup of multimedia phones. Last week, Motorola announced it would turn to Qualcomm Inc. for chips to speed the development of such phones, but said the products won't be ready until late this year at the earliest.

The market is likely to see further upheaval as Google Inc. works on new software, dubbed "Android," to speed the development of mass- market cellphones that can easily access the Internet. Motorola is among the handset makers that have agreed to carry the Google operating system on their phones.

Private-equity firms would be natural suitors for Motorola's handset unit, but with credit markets at a near standstill, they would have trouble lining up financing. Another challenge is determining whether a buyer would also acquire the Motorola name or license it.

Some companies might want to join up with Motorola's handset business as a quick way to gain scale in the U.S. Potential partners include Chinese telecom equipment makers Huawei Technologies Co. and ZTE, both of which have been underselling Western competitors in network equipment. The Chinese companies' cellphones, including ones offering high-speed Internet access, are selling well in markets like India and Australia. Both have signed deals in Europe.

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Matthew Karnitschnig, Amol Sharma and Li Yuan contributed to this article.