Motorola Inc. (MOT: 7.22 +0.03 +0.42%) intends to invest approximately $3.0 billion to 4.0 billion in cash into its loss-making cellphone business, to make it debt free, prior to its spin off into a separate entity in the first quarter of 2011. This step better positions the company to make acquisitions or develop new phones after the spin-off.The spin-off has been in progress since early 2008. Motorola has incurred losses of about $5 billion over the past three years, due to weakening sales. As of April 3, 2010, Motorola had $8.48 billion in cash and investments. Total debt, at the end of the first quarter 2010 was $3.9 billion, of which Motorola has raised $500 million to repay debt.
As per the recent strategy, Motorola plans to spin out the cellphone division and the cable set-top box business into a new company called Motorola Mobility. The other division of enterprise networking will be named Motorola Solutions. Motorola Solutions will be offered the remaining cash and will have to bear most of the other liabilities including pension obligations.
The company’s struggling cellphone unit is yet to recover from the competitive threat of smartphone maker Apple Inc. (AAPL: 274.02 +2.15 +0.79%) andResearch In Motion Ltd. (RIMM), while its set-top box business writhed due to a weak economy. Besides, its wireless network equipment business was hit due to a consolidation among telecom operators.
Nevertheless, Motorola has started showing initial signs of revival. In addition to its newly launched Android-based 3G smartphones, the company is continuously introducing innovative products for broadband communications infrastructure, enterprise mobility and public safety solutions.
In order to regain its market share, Motorola has been trying to reduce expenses and develop new smartphones, such as the Droid (which recently gained huge popularity and drove Motorola’s market share) for making the division profitable by the end of the year. Motorola smartphones are based on Google Inc.’s (GOOG: 499.27 -0.81 -0.16%) Android operating system. Verizon Wireless (VZ: 29.195+0.105 +0.36%) plans to release the next flagship Motorola phone, the Droid X, very soon.The market for broadband network and enterprise solutions will remain healthy in the long-run. We believe effective cost control measures, extensive demand for wireless broadband services, and newly introduced high-end 3G smart-phones will support the stock price in the near term. However, we do not foresee any above market gain for the stock any time soon and thus maintain our Neutral recommendation.
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