Motorola and Nortel: Two Against the World?

The Motorola Inc. (MOT ) division that makes the heavy-duty gear for wireless networks is ailing. The $6.5 billion unit lost $1.4 billion in 2001. Worse, it's falling behind in the race for contracts to build next-generation networks. Last year, Ericsson (ERICY ) and Nokia (NOK ) were the big winners when it came to supply agreements with carriers Cingular Wireless and AT&T Wireless Services (AWE ). "It's going to be very hard for [Motorola] to come back," says Bear, Stearns & Co. analyst Wojtek Uzdelewicz. The wireless unit is "a big headache."

That's why Motorola President Edward D. Breen Jr. is working behind the scenes to come up with an extra-strength aspirin. BusinessWeek has learned that Breen is in talks with top executives at Nortel Networks Ltd. about combining Motorola's infrastructure business with Nortel's (NT ) $5.7 billion wireless division. The two companies are exploring a range of options, including the possibility of Nortel's unit buying the Motorola unit and the combined company being spun out as an independent business, says a Motorola executive and two former execs at Nortel and Motorola. A Motorola spokeswoman acknowledged the company is "talking to everybody" but refused to comment on "speculation" about Nortel. Nortel declined to comment.

There could be several obstacles to such a union. Investors have soured on wireless stocks, making any share offering problematic. Another complication is Motorola's Invisix venture with Cisco Systems Inc. (CSCO ), which is developing next-generation wireless gear based on Internet technology. Nortel makes similar wireless Net equipment. So a deal with Nortel could destroy the Motorola-Cisco partnership. Cisco didn't respond to requests for comment.

Without a deal, both units are sure to struggle. Experts believe there's only room for three major infrastructure players. Ericsson is No. 1, with a commanding 28% market share, according to Bear Stearns. Nokia is No. 2 and rising, with a 12% share. Nortel, Motorola, and Siemens (SI ) each have about 11%, and Lucent Technologies (LU ) has 10%. "It's not a sustainable business model for people that can't be in the top three," says Matthew J. Desch, chairman of Airspan Networks Inc., a fixed wireless broadband equipment maker. "The only way to create share is by consolidating." Each of the smaller players has been involved in merger talks. In the past, Motorola has held talks with Lucent and Siemens as well, analysts say.

Wireless-equipment makers certainly can't count on internal growth. The global infrastructure market, which grew as fast as 44% annually during the 1990s boom, declined 5% last year, to $55 billion. Most big contracts for next generation wireless networks have been awarded. Pressure on equipment makers will grow as big wireless carriers begin to merge--a development that industry experts say must happen during the next several years. That would create even larger customers with increased leverage to negotiate lower prices.

By teaming up, Nortel and Motorola would complement each other's strengths. Both have suffered because demand is low. But Nortel has more products and strategic relationships with phone companies in Europe, which helped it land $1.5 billion in next-generation wireless contracts last year. Motorola does not make the switches that direct cellular calls--where Nortel excels. Nortel could benefit from Motorola's expertise in building base stations, which control a cell site's radio frequencies.

A deal would give the companies the scale and market share they need to compete. "It's sure better than not doing anything," says Richard H. Earnest, a fund manager at HighMark Capital Management Inc., which holds 250,000 Motorola shares. "Ericsson is beating the hell out of them, and Nokia came from nowhere." In this market, a decent chance of success is as much as anyone can expect from either company.

By Roger O. Crockett in Chicago

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