Motorola's Tricky Reality
Devices Unit Split
Faces Cash Crunch,
Lack of New Chief
By SARA SILVER
June 16, 2008
Motorola Inc. and its mobile-devices division have amicably agreed to separate. But working out the financial details may be tough.
As the telecom-equipment maker gets down to the nitty-gritty of spinning off its cellular-telephone business, an unpleasant reality is emerging. The mobile-devices division is losing so much money that breaking in two could put one or other of the newly independent firms in the poorhouse.
Motorola also is running into roadblocks over hiring someone to run the division, which has lacked a CEO since February 2007. The favored candidate -- Hewlett-Packard Co.'s Todd Bradley -- has withdrawn, people familiar with the situation say. Motorola declined to comment.
A big issue for any new hire is cash. The cyclical nature of the technology business requires companies to maintain higher cash balances than is common for other companies. Assuming Motorola can stem the mobile-devices division's losses -- totaling $1.6 billion since the end of 2006 -- the beleaguered business will need about $4 billion to support itself for two years as an independent company, credit analysts estimate.
That is roughly half of what Motorola's cash balance is expected to be at the end of this year. Acquisitions and buybacks helped cut the company's once-considerable cash pile by half, to $7.7 billion at the end of March from $15.6 billion at the end of 2006. Debt, by comparison, was $4.2 billion, slightly less than at the end of 2006.
Taking out $4 billion would mean that what is left of Motorola -- the enterprise-and-mobility group, which makes cable-TV set-top boxes, walkie-talkies and handheld scanners -- would likely be left with most of the debt and the rest of the cash.
Motorola's credit rating likely would be downgraded to "junk," analysts said. That would increase its cost of borrowing, or pressure the company to sell another division to raise cash.
This bleak scenario emerges even though the enterprise-and-mobility group generates hundreds of millions of dollars in free cash flow. But its profitability may be hurt by the breakup. The group shares factories, information systems and procurement with mobile devices. People familiar with the situation say that separating these elements could take months and cost as much as $750 million.
And mobile devices once supported two-thirds of corporate overhead, so the deal will require slashing costs elsewhere.
Of course, the mobile-devices unit could try to find new funding. Options include a private-equity infusion, a strategic partner or issuing convertible shares.
One person who isn't likely to put in cash is billionaire Carl Icahn, who already is down about $600 million on his $2 billion-plus investment in Motorola. At this point, it is hard to see how the veteran investor -- or just about anyone else -- can turn Motorola into a winner.
Write to Sara Silver at sara.silver@wsj.com1 |
