Despite heavy competition that seems to get more fierce by the day, Motorola took another step Monday to increase their exposure to the mobile phone market. In order to raise the cash needed to reinvest in their mobile device division, which made up 32% of overall company revenue in 2009, Motorola is selling a large piece of its network equipment division to Nokia Siemens Networks for $1.2 billion in cash. The assets, which account for 17% of revenue, will add about $0.50 per share in cash to the company’s coffers and boost the mobile device business ($7 billion annually) to 39% of company sales, as total sales will drop from $22 billion to about $18 billion after the divestiture.
I continue to find this turnaround strategy less than exciting from an investor standpoint. Motorola is essentially divesting itself of a slower growth business despite a strong market position and stable cash flow in an effort to reduce the diversity of the company’s business lines. If the mobile device market was not so competitive, Motorola had a better leadership position already, and/or the profit margins on cell phones were higher than its other divisions, I might think such a move was smart. However, we have seen how difficult it is to make a lot of money selling mobile phones. In order for this transformation to work for investors, Motorola has to somehow figure out a way to steal consumer subscribers from Apple and corporate customers from RIM, which seems like a very difficult task (not to mention strong second tier players such as HTC, Samsung, LG, and perhaps HP/Palm).
From an investment perspective, buyers of Motorola today have to want to get exposure to their mobile business (think Droid, etc). While their new products in this space are undoubtedly pretty solid offerings, without significant market share gains in the market going forward, I do not see Motorola really boosting their underlying profitability with this turnaround plan. Not only that, but with plans to split the company up into two pieces early next year (mobile devices/home and enterprise), Motorola is going to live and die by the mobile business even more as time goes on.
Meanwhile, the company does not appear to be getting top dollar for their other businesses. This latest deal has them giving up 17% of their company’s sales in return for about 50 cents per share in cash (which is only about 6% of their market value). At that rate, the entire company would only be worth about $3 per share (the stock spiked up to around $8 yesterday on the news of the sale).
Now, the company would make the argument that the networks business they are selling was a drag on their valuation (as the least desirable part of their company), but the numbers seem to tell another story. Motorola had previously contemplated selling their entire home and networks business (~$10 billion in sales) for between $4 and $5 billion. They abandoned that plan and sold only the wireless network part ($3.7 billion in sales) for $1.2 billion, due in part to a lack of interest at the price they were asking.
All in all, with a market value of $18 billion Motorola better figure out a way to turn their mobile phone business into a consistent money maker, as the company is selling off a lot of their profitable divisions to focus on the one business line that is losing money. Based on how the mobile phone market has played out in the last few years, Motorola has a tall task ahead of them, and shareholders should be wary.
Full Disclosure: Long Apple and RIM, and no position in MOT, at the time of writing, but positions may change at any time.