Motorola hopes chip split boosts bottom line

The decision to spin off Motorola Inc.’s Semiconductor Products Sector (SPS), announced Monday, brings renewed promise to both SPS and the company’s cell phone business despite exposing some of the inner political turmoil at the parent company, analysts said Tuesday.

Both parties stand to benefit from the separation of the two businesses, which have struggled with tough competition in the cellular handset market. Nokia Corp. has overtaken Motorola’s worldwide position as the cellular phone market-share leader, and Intel Corp. and Texas Instruments Inc. (TI) have squeezed SPS because they have more flexible customers and broader opportunities to sell chips more widely than has SPS. [Please see Motorola to spin off semiconductor business.]

“It’s better for both parties to be separate. Motorola can order from any world-class supplier, and SPS will no longer be encumbered by the perception that they had to serve Motorola first,” said Matt Hoffman, principal senior analyst with Soundview Technology Corp. in Old Greenwich, Conn.

Motorola was rare among its competitors in the handset business in that it manufactured its own semiconductors for its own line of cellular phones, said Will Strauss, principal analyst at Forward Concepts Co. in Tempe, Ariz. SPS was obligated to design most of its chips for the parent company’s cell phones, but the cell phone division was free to purchase chips from other suppliers, which caused a bit of consternation among SPS employees as they were forced to compete for business within their own company, he said.

“Being part of Motorola has been both a blessing and a curse for (SPS),” said Mike Feibus, principal analyst at TechKnowledge Strategies Inc. in Scottsdale, Ariz.

SPS will get to now make chips for a broader market, but will likely maintain a strong relationship with Motorola, Strauss said. Current SPS President Scott Anderson has a great deal of experience with chips for the automotive and telematics market, having led that group at SPS before being named president of the division in June.

That history will help the division expand its product line into those developing markets, Strauss said. SPS has made some progress already in bringing a full product line to market, and becoming a separate entity would speed that transition, Feibus said.

Many cell phone companies have been reluctant to purchase chips from SPS because they didn’t want to give one of their strongest competitors any of their money, Strauss said. Vendors such as Siemens AG or LG Electronics Inc. will probably be more interested in SPS’ products such as the i.MX family of processors for their phones, he said.

Outgoing Motorola Chairman and Chief Executive Officer Christopher Galvin had long insisted that Motorola enjoyed a competitive advantage by having its own semiconductor design team in house, but TI’s recent history indicates otherwise, Strauss said. TI made the decision to dump all equipment manufacturing in favour of a focus on semiconductors and that has paid off handsomely for the Dallas company, he said.

The decision also frees up Motorola’s Personal Connectivity Sector (PCS) to choose from a broader range of chip suppliers. That expanded range of choices is good for both the industry and customers, Feibus said.

“The semiconductor business is so competitive, it’s hard to expect one company to stay at the top with every generation. If you don’t have to prop up an internal division, you can pick from the best,” he said.

The timing of Monday’s announcement, coming after news of Galvin’s resignation from Motorola pending the selection of his replacement, makes it appear that Galvin lost a strategic battle regarding SPS, Soundview’s Hoffman said.

Motorola had shopped SPS to potential buyers in the past, but Galvin had always wanted to preserve the makeup of the company his grandfather, Paul Galvin, created in 1928, publicly stating his desire to keep the company in-house several times, Hoffman said.

Galvin announced he was stepping down from the board of directors in September, citing disagreements over the company’s long-term strategy with the board. With Monday’s announcement, the board is moving forward quickly with changes Galvin had once resisted in hopes of improving the company’s balance sheet and earnings, Hoffman said.

“You can assume that there was a major strategic difference with the board and Galvin, and given the timing of the events, where he retired and SPS got spun, you can assume this was what they disagreed about,” Hoffman said.

Motorola has endured a difficult couple of years. The situation appears to have stabilized, as the company as a whole posted a net profit for the second quarter of 2003, but second-quarter revenue declined 10 per cent from the second quarter of 2002.

SPS was the only division at Motorola to lose money in this year’s second quarter, posting an operating loss of US$125 million. The company blamed the loss on the impact of the Severe Acute Respiratory Syndrome (SARS) virus that afflicted Asia earlier this year.

Motorola is considering an initial public offering to sell a portion of SPS shares, and would distribute the remaining shares to existing Motorola shareholders, company executives said in a conference call Monday. More details about the proposed transaction will be revealed when Motorola files statements with the U.S. Securities and Exchange Commission, they said.

As a separate entity, Soundview Technology estimates that SPS would be worth US$7.2 billion, Hoffman said.

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