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Moto to Spin Off Device Unit What Now?

After weeks of rumblings around the rumor mill, Motorola Inc. did what many think it should have a while ago: announced it is separating its devices business from its Broadband and Business Mobility division (in English, thats the infrastructure side of the house). Both will be standalone, publicly traded companies. Investors were huzzah-ing, with Motorolas stock up more than 5 percent in morning trading.

Thats welcome news for embattled Motorola, which has lost more than 60 percent of that stock price since October 2006. The question however remains: will the restructuring work in the long run? Or even the short run, seeing as the split wont go into effect until next year?

As for Motorola, no one is commenting. Investors have placed Motorola which has a $22 billion market cap on watch lately thanks to some uncertainty on the executive level. The vendors second-largest investor, Carl Icahn with a 3 percent stake, has been fiercely critical of Motorolas failure to increase shareholder returns (to put it in the nicest possible way), and last year engineered the ouster of CEO Ed Zander, who was replaced by Greg Brown. The companys CTO, Padmasree Warrior, also defected to Cisco Systems Inc. not long after Zander stepped down.

But that has not been the end of the rocky executive road, however; Icahn is now once again engaged in an increasingly dissident proxy battle at the company, bellowing to replace four of Motos board members with his own hand-picked directors, ahead of Motorolas annual meeting on May 5. He also has stepped up legal efforts to force Motorola to open up the files on the devices business and certain executives.

That turmoil at the top hasnt been the only issue affecting investor confidence in Motorola. It has also been suffering from its linkage with another topsy-turvy corporate entity, Sprint Nextel Corp. . Motorola is a key infrastructure partner for Sprints WiMAX network, which has also been the subject of speculation as to when Xohm will roll out, if it can keep partnerships alive to do so and whether Sprints continuing profit loss will allow the carrier to finance it in the first place. And a loss of the WiMAX business leaves a big revenue hole in Motorolas future balance sheet.

As for the soon-to-be-left-out-in-the-cold devices biz, Motorola is already looking for someone to head up that unit, which is No. 3 globally in market share having recently lost the No. 2 spot to Samsung.

But that may be a moot point as the operating profile for that line of business is so weak that many Wall Street analysts wonder whether it can survive on its own. After a wildly popular RAZR and its me-too successors fell on the sword of overexposure, Motorola has been unable or unwilling to innovate its way into competing with the iPhone or new models from No. 1 Nokia and Samsung. Sales for the fourth quarter of 2007 dropped 18.2 percent, from $11.79 billion to $9.65 billion, as Motorolas profits plunged 84 percent thanks to the drag from the handset business. 2008 is not looking cheery either: UBS analyst Maynard Um for example cut his estimate for the companys handset sales down to 130.2 million units for this year, from 145.6 million.

Conventional wisdom says that a joint venture with a stronger handset maker from Asia, perhaps looking to increase its presence in the U.S. market may be a better bet than going it alone; or, maybe the unit will be bought outright.

Could this be the beginning of a recovery for Motorola? asked analyst Jeff Kagan. It will take time to occur, but it could be. This could be the start of the recovery for the company. Shareholder value should show an increase, at least short term. Then it depends on the process. This is very early in the planning stages. Motorola is giving no speculation or forward projections yet.

How the shares will be split (other than it will be tax-free and taking place in 2009) and how the branding will shake out also remain questions at time of posting.

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