Motorola breakup talk swirls
`Something dramatic,' maybe whole or partial sale, forecast by analyst
chicagotribune.com
By Barbara Rose and Andrew Countryman
Tribune staff reporters
Published September 28, 2003
Motorola Inc.'s decision to hire a new CEO has placed the cell phone and chip maker squarely in the cross hairs of investment bankers.
Many are betting that Christopher Galvin's successor will take a fresh look at Motorola with an eye toward spinning off or selling businesses to reposition the chronic underperformer and boost its stock price.
"I think it's highly likely they will either sell the whole company or sell off divisions," said investment banker Daniel Bryant of Jeffries & Co. "Either way, there's something dramatic on the horizon."
The case for a revamp is reflected in Motorola's market value. The diversified tech giant trades at a sharp discount to many so-called "pure play" companies that compete with Motorola in the wireless, semiconductor and broadband sectors. A pure play focuses on a single sector.
A Tribune analysis reveals a wide gap between what Motorola fetches as a whole and what it could be worth broken up, if each of its five major businesses traded at the multiples awarded competitors.
Motorola's market value is $29.16 billion, but the combined value of its five major businesses, using its lowest-performing competitors' multiples, would be $38.74 billion, or 32 percent higher.
The analysis, based on sales multiples, is crude because it does not account for such important variables as profitability and cash flow. But it illustrates investors' preference for pure plays over conglomerates.
Adding to the pressure for a breakup: Motorola's painful stock performance. Since tech stocks peaked in March 2000, Motorola has underperformed most of its peers and all the major stock indexes. And even though it fell further than most, it also lagged many of its pure-play rivals during the recent tech stock run-up.
If Motorola's stock reflected its break-up value and traded 32 percent higher, that would add $4 per share, pushing the stock above $16.
The stock would rise to $14 per share if Motorola sold its money-losing semiconductor business and used the proceeds to reduce debt and buy back stock, according to an analysis by Soundview Technology Group's Matt Hoffman. Motorola's stock closed at $12.53 Friday.
A semiconductor sale also could improve performance at other divisions because they would be freer to turn to other--possibly better--suppliers, Hoffman said.
Despite its poor financial performance, Motorola has enviable positions in its diverse markets. It is the world's second-biggest cell phone-maker, a business that contributes 38 percent of sales. It also ranks as the No. 1 maker of TV set-top boxes, the No. 2 maker of microprocessors and the leading producer of police radios and emergency communications systems.
"That model was in vogue in the 1960s and 1970s, when it was thought that having diverse businesses would smooth out your earnings cycle," said Joe Cornell of Spin-off Advisors, an investment banking research firm.
"That view has fallen by the wayside," Cornell said. "It's very difficult to run a lot of different businesses well. It's harder to understand these businesses. Investors would rather bet on a pure play."
Motorola's numbers underscore his point.
The company trades at 1.11 times sales for the 12 months ended June 30, according to the Tribune's analysis.
Lucent Technologies Inc. fetches a lower multiple, but Lucent is losing money while Motorola is profitable.
Other competitors' multiples range as high as 2.24 times for cell phone-maker Nokia--a market leader with wider profit margins than Motorola--and 4.47 for chipmaker Texas Instruments, which supplies Nokia's chips.
Motorola's board has declined to say whether it favors a radical revamp. "It would be speculating to comment on the company's strategy options," said spokeswoman Jennifer Weyrauch.
One thing is certain: Decisions will not come quickly. A typical CEO search takes at least four months, so Galvin's predecessor may not be named until early next year.
The new CEO will need time to review Motorola's businesses with financial and strategic advisers.
"There are only a handful of ways to increase shareholder value," said investment banker Bryant. "One is to dramatically restructure, which Galvin has been doing for years and which hasn't worked. Another is to put more resources and money behind faster-growing divisions and sell non-core businesses."
Semiconductor unit targeted
The solution most frequently cited by Wall Street would be to sell Motorola's capital-intensive semiconductor and networking businesses in order to focus on cell phones.
"Obviously the biggest impact they could make would be to divest the semiconductor and telecom equipment businesses," said Morningstar Inc. analyst Todd Bernier.
Qualcomm Inc. went a different route in paring down to less than $4 billion in annual sales. It sold its cell phone and wireless gear businesses to design chips and software that make phones work, focusing solely on CDMA technology.
CDMA, or Code Division Multiple Access, is one of the fastest-growing wireless technologies. Qualcomm contracts with foundries to make its products.
"Motorola has got to do the same thing: Get small, focus on something and do it really well," Bernier said.
Yet selling businesses may not be easy.
Motorola was in negotiations this year with Germany's Siemens AG to sell its networking business and to buy Siemens' cell phone business, but the talks broke down.
Motorola also was in talks with Nortel Networks Ltd. about combining their wireless equipment units into a separate jointly owned company. The negotiations foundered over price and valuations.
Still, Motorola's networking and semiconductor businesses are in better shape to attract buyers than at any recent time, analysts said.
The networking business is profitable again. The semiconductor business, while losing money, is reporting positive cash flow.
Motorola's "asset light" strategy has slashed capital costs at the chip unit, which has shed more than a dozen factories while outsourcing production.
Key decisions remain. The company is negotiating a deal to cut its losses at a large plant in Tianjin, China, which operates at a fraction of capacity. Galvin's resignation could delay a deal because a new CEO would want to review all of Motorola's investments in China, the company's most important market outside North America.
Whatever the outcome in China, analysts say the chip business, based in Texas, likely would perform better outside Motorola's umbrella.
Soundview analyst Hoffman estimates the business could fetch $7 billion if it were broken up and sold off in pieces, by product line.
Finding a single buyer would be tough. "I can't think of a situation where there would be a good fit between Motorola and another chipmaking company," said Gartner Inc. analyst Stan Bruederle.
Leverage buyout an option
Another possibility: negotiating a sale to a large buyout firm that eventually would take the business public.
There is precedent for a leveraged buyout. In 1999, Motorola sold its commodity chip business, with sales of $1.5 billion, to Texas Pacific Group. That deal produced Nasdaq-traded ON Semiconductors Corp., based in Phoenix.
Other possibilities include combining and spinning off related businesses with steady but moderate growth that have few synergies with Motorola's cell phone business.
For example, Motorola's semiconductor unit is the No. 1 supplier of chips to the auto industry--a business within Motorola's chip division that is solidly profitable.
Motorola could combine the business with other auto-related units, such as its telematics business, and spin them off together.
"Detroit is a big game and Motorola is a big player in that game," said Ed Snyder of Charter Equity Research. "It's a serious asset that somebody else could exploit better than Motorola."
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