Motorola to spin off handset division

Motorola is to split into two companies, following months of speculation about the future of its handset division.

Subject to "further financial, tax and legal analysis", the American communications giant will next year spin off its mobile-devices business as an independent, publicly traded company, which will take with it a range of technology and intellectual property.

If the split goes through as planned, what will remain will be the "broadband and mobility solutions" business, which includes enterprise mobility, government and public safety, and Motorola's home and networks divisions.

Despite the fact that recent months have seen a flurry of speculation about Motorola's handset division, which many have seen as performing poorly, Wednesday's announcement caught the industry off guard. The views of activist investor Carl Icahn, who owns a five percent stake in Motorola, are widely regarded as being a major factor in the decision to split the company. Icahn has been trying to get four directors onto Motorola's board and is suing the company in an attempt to acquire documents relating to its handset business.

According to Wednesday's statement, the split will take the form of a "tax-free distribution to Motorola's shareholders… resulting in shareholders holding shares of two independent and publicly-traded companies".

"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 advisers," said Motorola president and chief executive Greg Brown on Wednesday. "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 added that a search was now underway to find a chief executive for the new mobile-devices company. Motorola is currently in third place worldwide in the handset-manufacturing business, behind Nokia and Samsung.

The seasoned Motorola watcher and Ovum analyst Martin Garner said on Wednesday that splitting off its handset division was "the only option" left to Motorola.

"Certainly, for me, the thing that sealed it was in the fourth-quarter results where they said that not only is the handset division not improving at the moment but it would actually get worse before it got better," Garner told ZDNet.co.uk. "[Planned] new handset platforms still to feed through, and to have another whole year of performing as it had been doing was too much. There was no way you could say at that point that there were strong synergies with [Motorola's] other businesses."

Garner said the decision to split off the handset division would likely "draw a line" under the current arrangement, which he described as "a bit of a poisoned chalice", noting the high departure rates of executives and staff. However, he warned that the decision "will not provide an instant fix for the underlying problem, which is that they don't have a broad enough portfolio of attractive handsets".

"[Motorola needs] a long hard slog of product development, which they are [engaged] in," said Garner. "Announcing this… will be a relief in terms of investor relations and hiring people. It will be a fresh start but it will not, of itself, fix the product range." He added that it has been "almost two years" since Motorola's flagship Razr handset "started to run out of steam".

Gartner research vice president Leif-Olof Wallin said Motorola's move showed that the company had not been successful in its search for prospective buyers for its handset business.

"The next step will be to look for buyers outside the handset business, including private equity, to spin out the [new company] or possibly IPO it," said Wallin in a Wednesday statement. "Over the past years, we've seen virtually all western device manufacturers, except Nokia, divest their handset business (Alcatel, Phillips, Siemens with [joint ventures or divestitures] and Ericsson with a joint venture with Sony)."

Wallin added that "it looks like none of the other handset vendors have showed sufficient interest in acquiring Motorola's handset business, which indicates that the divestiture might take some time."

"During this time, the handset unit will be under considerable stress with lots of inward-looking activities taking time and focus away from products, sales and marketing which might further fuel a negative spiral," Wallin said. "Competitors, most notably Samsung, Nokia and LG will probably gain the most during this period."

The New York Stock Exchange had not yet opened at the time of writing, but Motorola's shares on the Frankfurt Stock Exchange had risen by more than nine percent since the start of Wednesday's trading.