Motorola split should finally unlock value

November 22, 2010

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Motorola promised in early 2008 to break itself up under pressure from activists. It’s taken a long while — but come January that day finally arrives. Given the pace of Motorola’s restructuring, that sounds like plenty of time for investors to have ferreted out hidden treasure. Yet there’s still a gap between Motorola’s current and break-up value.

The $19 billion tech company is cleaving itself in two. Motorola Solutions will house its businesses manufacturing wireless devices, such as walkie-talkies and communications network gear, sold mainly to enterprises and governments. It should have about $8 billion in sales next year. The other bit, Motorola Mobility, will sell cellphones and set-top boxes for consumers. Its sales should be roughly $13 billion a year.

This isn’t just financial fiddling. As communications technology has become more specialized and sophisticated, the two divisions don’t have much in common. Designing hip handsets for consumers and rugged emergency equipment for firefighters requires different mindsets and investment time-frames.

Moreover, splitting from a unified corporate parent often frees the resulting smaller companies to run themselves more efficiently and motivate staff more effectively. That, for instance, was the case with conglomerate Tyco International when it split into three companies in 2007. Each of the stocks has since outperformed the S&P 500.

Even ignoring these potential benefits, Motorola’s assets look undervalued. Motorola Solutions is steadily profitable, and the company says revenue should grow at least 5 percent annually over the next several years. Similar companies such as Harris, Cisco and Honeywell trade at about 1.3 times revenue, according to Barclays Capital. On that basis, the Motorola business would be worth about $10.4 billion.

The Mobility arm is a bit harder to value. Selling set-top boxes should generate steady profits. The formerly troubled handset business, which accounts for about two-thirds of sales, is on a tear thanks to the popular Android phones. This business is now running at about break even, but margins should rise as volumes increase. Put the division on the same 0.5 times sales multiple as Nokia — which may be conservative given Nokia is on the wrong side of smartphone trends — and Mobility is worth $6.5 billion.

Add $7 billion for net cash on the balance sheet and the sale of some operations and subtract $2.4 billion to fill a pension hole, and Motorola should be worth around $21.5 billion. That’s 13 percent above its current market capitalization. Investors haven’t rushed to close this gap, but January’s split could finally make the difference.

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