Motorola Goes to Zero

On behalf of lazy investors everywhere, I want to say "thank you" to Motorola (NYSE: MOT  ) .

Describing its thinking on the long-awaited cell phone division spinoff yesterday, Motorola laid out a plan of elegant simplicity. One company comprising two very different businesses will be split down the middle into two companies of equal sales size ... with very different business models.

The good business, Motorola Solutions (MS), manufactures workaday wares such as radio sets, handheld scanners, and telecom equipment. Even better, it makes money doing it. With $11.1 billion in annual revenue, MS generates essentially all of the company's free cash flow. In contrast, the bad business that we normally think of when the name Motorola pops up -- the one that sells cell phones (alongside more profitable set-top boxes, and DVRs) -- is Motorola Mobility (MM), which is of equal size, but has continually struggled and lost money on the bottom line.

Motorola goes to zero
With me so far? Motorola Solutions makes money; Motorola Mobility doesn't. A pretty clear distinction so far -- and thanks to management's genius, it's about to get even clearer. You see, in the process of breaking up the company, Motorola will reshuffle its balance sheet to sharpen the distinction between what-will-become MS and MM. Motorola promises to use its $8.5 billion in cash to pay off a majority of its $3.9 billion in debt, then give almost all of the remaining cash to MM. To top it all off, MS will shoulder both companies' existing pension liabilities.

In other words, post-spinoff, MM should have zero debt, and zero pension liability. And it gets better. If all goes well with Verizon's (NYSE: VZ  ) rollout of the new flagship Google (Nasdaq: GOOG  ) Android phone, the "Droid X" smartphone, MM may earn a profit, or at least break even, this year. So make that zero debt, zero pensions, and zero losses. (And a chance to do better.)

Zero never looked so good
If all this sounds like a plan designed with the express in-tention of attracting a-ttention from investors -- well, it should. Persuading people to buy into a business that has dropped from a 20% cell phone market share to 3% in just a few years, that has to do daily battle with Research In Motion (Nasdaq: RIMM  ) and Apple (Nasdaq: AAPL  ) in smartphones one minute, then turn around and tackle Alcatel-Lucent (NYSE: ALU  ) on telecom networking the next, is going to be a tough sell.

Lucky for investors, Motorola's making the investment thesis on this one as simple as humanly possible.

Apple is a Motley Fool Stock Advisor pick. Google is a Motley Fool Rule Breakers selection, and also, Fool contributor Rich Smith owns shares of Google. The Motley Fool has a disclosure policy.


Read/Post Comments (5) | Recommend This Article (15)

Comments from our Foolish Readers

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  • Report this Comment On June 18, 2010, at 9:51 PM, one67hk wrote:

    just a bit confused.......they get a problem in the handset business, then logically, they shall use all their means to fix the "business" bugs and put the company back to profitability.....what the senior management trying to do right now is to use a corporate restructuring startegy to 're-package' the company to make it more appealing in the stock market.....yet, will this become a success? i doubt.....since fundamentals that making the company continue its dips still there and just never change, or have limited changes only.....

    on the other hand, i would like to know, if there really exists any intiatives which can only be implemented with/after the break up of the company??

    "Creating another separatly listed company" will save the world seems too naive... core of the issue is a CEO managerial capability....we need to solve problem by go deep to fix the root causes, not by just creating another listed company and re-shuffling the balance sheet.....we are not kids just relying on some creative i-bankers naive ideas...... the company has once been an icon...

  • Report this Comment On June 21, 2010, at 12:03 AM, greenwave3 wrote:

    MOT may still successfully sell its wireless division. I anticipate a bid from Google, who is looking to vertically integrate.

  • Report this Comment On June 21, 2010, at 12:05 AM, greenwave3 wrote:

    Motorola is looking as attractive as it has in years right now. I wouldn't be surprised at all to see MOT over $8 in less than a month.

  • Report this Comment On June 24, 2010, at 12:40 PM, Davidp50 wrote:

    So what happens to current stockholder of MOT when the split takes place?

  • Report this Comment On June 25, 2010, at 6:44 PM, funny5 wrote:

    Initial reviews indicate the Motorolla "Droid X" has generally weaker specs than the recently released iPhone 4. I'm not expecting the "Droid X" to do all that well - probably sell less than the Nexus One. HTC's Droid Incredible appears to be the top Android phone for the time being.

    See Droid X specs vs. iPhone 4 specs here:

    http://www.theregister.co.uk/2010/06/24/motorola_droid_x/

    I have an original Motorolla Droid, and am rather happy with it.

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