March 26 (Bloomberg) -- Motorola Inc. plans to split into two companies next year amid pressure from billionaire investor Carl Icahn to break off the money-losing mobile-phone business that it pioneered 25 years ago.

One company will focus on handsets and the other will sell network equipment, cable TV set-top boxes and two-way radios -- businesses that are profitable and growing faster. The board is looking for a new chief executive officer for the phone business, Motorola said today in a statement.

The decision buys time for CEO Greg Brown to revitalize the handset unit before the split. Icahn has said the division is undervalued and demanded that it be separated with new management. Motorola shares have fallen 55 percent in the past two years as customers defected to phones from Apple Inc. and Nokia Oyj.

``If they had been forced to sell it off, shareholders would have been forced to accept a bargain basement price,'' said Richard Windsor, a Nomura International analyst in London who recommends holding on to the stock. The move is ``the one that makes the most sense for shareholders.''

Motorola, based in Schaumburg, Illinois, said it wants the split to be a tax-free way for investors to hold shares in two publicly traded companies.

``This is the course of action that we feel best about,'' Brown, 47, said in an interview. He said the plan will create ``significant'' shareholder value.

Motorola rose 26 cents, or 2.7 percent, to $10.02 at 4 p.m. in New York Stock Exchange composite trading. This year, the stock has traded at its lowest level in more than four years.

Icahn's Response

Icahn, who owns about 6 percent of Motorola's stock and is the No. 2 investor, said today that while Motorola's plan is ``a step in the right direction,'' the company should move faster.

``Decisive action is required to reposition the mobile devices business for success as an independent company,'' Icahn, 72, said in a letter to Motorola's board. He didn't return a call seeking comment.

Motorola lost market share last year after failing to repeat the success of its Razr, which created the category of slim phones in 2004. The device, which initially sold for $500, lost its cachet and is now free with some calling plans. While all its main rivals boosted sales in the fourth quarter, Motorola's phone shipments plunged 38 percent.

`Clarity of Direction'

The breakup will accelerate a recovery in the handset business and provide ``clarity of direction'' for customers and employees, Brown said on a conference call. The company said on Jan. 31 that it would consider splitting off the unit.

Motorola's handset business will probably have a value of $1.69 a share next year, while the other divisions could be worth $7.49, Merrill Lynch & Co. analyst Tal Liani in New York said today in a note to clients. Brown wouldn't comment on the potential market value of the phone unit.

``The Razr was so successful as a unique product that it masked a lot of the underlying problems,'' said Michael Walkley, an analyst at Piper Jaffray & Co. in Minneapolis. ``Once Razr sales started to fade, their cost structure wasn't competitive, especially now that they don't have the right products for the market.''

Brown declined to comment on the effect of the split on earnings or what will happen to the Motorola brand name.

`Improved Flexibility'

``Each company would benefit from improved flexibility, a capital structure more tailored to its individual business needs and increased management focus,'' said Brown, who took over after Ed Zander stepped down at the start of the year. Brown said that he and Chief Financial Officer Paul Liska will stay with the network equipment business.

Icahn sued Motorola this week, demanding documents detailing the strategy for the mobile business. He has nominated four directors for election to the board at Motorola's May 5 annual meeting.

Today, Icahn asked Motorola's directors why they won't accept his nominee Keith Meister as a board member. He said he is still offering to drop his proxy fight if Motorola accepts two of his nominees, including Meister, who is principal executive officer of Icahn Enterprises LP, the holding company for Icahn's hedge funds.

``What possible reason is there for not putting Keith Meister on the board?'' Icahn asked. ``After all, how much can he eat at the board meetings?''

Motorola spokeswoman Jennifer Erickson declined to comment on Icahn's letter.

Motorola's handset business lost $388 million last quarter. The networks and set-top box unit had a profit of $192 million on 11 percent sales growth, while the unit making radios and scanners had a profit of $451 million and a 35 percent revenue increase.

`Lack of Detail'

Merrill's Liani and Morgan Stanley analyst Scott Coleman in New York said the breakup won't boost Motorola's value alone and that the company has to fix the handset business.

``The lack of detail on the timing and process creates additional uncertainty around the future of Motorola's handset business,'' Coleman said today in a note.

Goldman Sachs Group Inc. and JPMorgan Chase & Co. are advising on the transaction, Motorola's Erickson said.

Apple stepped up competition with the introduction of its Web-browsing iPhone in June. The company sold 2.3 million of the devices in the holiday quarter. Motorola's Razr sequel sold 1.5 million units in that period.

Motorola traces its roots back to 1928, when the company was founded as Galvin Manufacturing Corp. in Chicago. It introduced its first car radio in 1930 and devised the Motorola brand from the combination ``motor,'' as in motorcar, and ``ola.''

DynaTac

The company started selling the world's first commercial mobile phone, the DynaTac, in 1984. The device acquired further cachet in 1987, when fictional financier Gordon Gekko, played by Michael Douglas, used it to broker deals in the movie ``Wall Street.''

In 1996, Motorola introduced the $1,000 StarTac, among the first handsets to flip fully open. After its appeal faded, the company lost its No. 1 position in 1998 to Nokia, whose candy- bar-shaped phones won over customers in Europe and Asia.

To revive sales, Motorola brought in Zander in 2004. He replaced Christopher Galvin, the grandson of Motorola's founder, ending the family's 75-year dynasty. Zander introduced the Razr later that year.

The device, which sold more than 110 million units, helped Motorola cement its position as the second-largest handset maker and fend off Asian competition until last year. Samsung Electronics Co. took over the No. 2 spot from Motorola in the second quarter with its sleek Sync and BlackJack devices. Sony Ericsson Mobile Communications Ltd. may steal the No. 3 position this year, demoting Motorola to fourth, analysts say.

To contact the reporter on this story: Ville Heiskanen in New York at vheiskanen@bloomberg.net; Amy Thomson in New York at athomson6@bloomberg.net

Last Updated: March 26, 2008 17:58 EDT