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Motorola: Mightier Minus Chips?

By Roger Crockett Motorola dropped its second bomb in two weeks on Oct. 6. After announcing CEO Christopher Galvin's resignation in late September, the company said it plans to spin off its moribund semiconductor business into a separate, publicly traded company. "We believe that by creating two independent companies we will be able to better unlock the value of Motorola's existing businesses," Galvin said during a conference call.

It's about time, as far as Wall Street is concerned. Investors cheered the move -- sending Motorola (MOT) stock soaring 10%, to $13.50. The semiconductor unit has been a longtime thorn in Motorola's portfolio. At $4.8 billion in 2002 sales, it represents about 18% of total revenues. But it has struggled to turn a profit in recent years. And while Motorola excels in making embedded chips that power cars, trucks, and even toasters, it hasn't kept pace with giant rivals like Texas Instruments (TXN) and Qualcomm (QCOM) in Motorola's bread-and-butter industry: wireless phones.

With semiconductor makers in a protracted slump, Motorola's money-losing chip business has drained resources and held back value for the overall corporation. "It's something they should have done years ago," says Paul Sagawa, analyst at Sanford Bernstein.

WHY NOW? Motorola's board of directors is hoping that by spinning off the chip unit, the company can turbocharge growth. From 2001 to 2002, rival TI's and Qualcomm's revenues grew about 40% each, according to Gartner Inc., while Motorola's nudged up about 8%. The unit primarily sells its wireless chips in-house -- to Motorola's cell-phone unit -- as well as to about 14 other handset makers. But big buyers such as Nokia (NOK) and Samsung aren't customers.

Motorola's new chip products, the i200 and i250, were expected to start penetrating the market during the second half of this year. "But so far we're not seeing strong growth with these new products," says Stanley A. Bruederle, Gartner's research vice-president semiconductor applications. Time for a change in strategy.

It makes sense that, by spinning off the semiconductor unit, customers may be more apt to buy goods from the independent company. But why now? Signs are cropping up that the chip industry is finally emerging from its slump, and investors are pumping up these companies' values. TI is trading at 4 times its estimated sales in 2004, Intel (INTC) at 5.8 times 2004 sales, United Micro (UMC) at 5.3 times 2004 revenues, and Cirrus Logic (CRUS) at nearly 3 times.

CONSTANT STRUGGLE. Most analysts expect Motorola's chip-unit initial public offering to fetch from 2 to 4 times its $5.4 billion in anticipated 2004 sales. "I would argue that these valuations are not realistic," Sagawa warns. "But by executing the spin-off as quickly as possible, Motorola has the best chance of getting value."

The move just might work. But it won't matter much to the rest of Motorola unless execs increase their focus on the cell-phone, wireless infrastructure, and broadband businesses. These units operate in increasingly competitive markets where growth is declining. The handset industry is beset by increased commoditization, and Motorola constantly stuggles to keep pace with ever-nimble Nokia plus new Asian competition. The wireless infrastructure unit severely lags behind rivals in the number of third-generation data contracts -- a shortfall that might be difficult to overcome.

So the next few months will be telling. Motorola will distribute a portion of semiconductor equity to shareholders and spin out the unit over the next six to nine months, estimates Blaylock & Partner's analyst Rick Black. In the meantime, it's also expected to have a new CEO in place. If Motorola is to continue its current momentum, the corner suite's new occupant may need to drop a few more bombs. Crockett covers Motorola from BusinessWeek's Chicago bureau, where he's deputy chief

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