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Motorola to Split in Two, Hopes to Regain Overseas Strength


Investors should focus on how the company will reestablish itself in China.

Late last week, Motorola (MOT) filed Form 10 with the SEC as part of its planned split into two separate and publicly traded companies. The SpinCo (as they are referred to in SEC documents) will consist of mobile devices and its home solutions operations, and will operate as Motorola Mobility. The tax-free distribution to existing shareholders is expected to be completed in the first quarter of 2011.

Together, the two operations represented about $2.5 billion of revenue in the March quarter, split about two-thirds and one-third between mobile devices and home, respectively. Gross margin was about 24% but the combined entity had an operating loss of $172 million in the period driven by mobile devices. The home segment earned $20 million on $838 million in revenue.

What's interesting in the filing is the geographic dispersal of revenue shown in the graph below. Obviously, this represents both business segments but we do know from the filing that 42% of the mobile devices revenue originated outside the US. However, if you believe as I do that the vast majority of Latin American revenue is mobile devices, come to Europe and Asia generating a paltry 26% of mobile-device revenue.

All of this is a far cry from four short years ago when then-CEO Ed Zander was proclaiming the number-two market share in North Asia and growing, the number-two market share in high-growth markets and growing, the number-two market share in Europe and growing, and more than doubling its market share in India, sequentially.

As the "stuff" hit the fan, the company rightly needed to shrink its operations, but when you look at what took place over the last few years it begs the question: Did they restructure in the wrong geographies? I've always liked to use China and India as proxies for emerging markets and the graph below provides a snapshot as to what growth has taken place in those two locations. When you consider this is new subscribers not phones sold, the numbers are even larger.

Granted, Motorola was fighting for its survival, but this was also a huge wave to miss.

Going forward, the mobile-device strategy continues to prioritize markets with the focus on North America and China initially. Exactly how it's going to reestablish itself in China should be a focus of investors. These two areas are then followed by Western Europe, Latin America, and "other parts of Asia" in 2011. The same question applies here as well as in what order.

Weighing on its ability to reenter the global stage will be the resources that Motorola mobility has at its disposal. The cash position wasn't included in the Form 10 filing but we know that all debt will be retained by the "other" Motorola. The only cash flow statement available was on an annual basis. In 2009, Motorola Mobility burned $1.1 billion, not much of an improvement from the $1.2 billion used in 2008. The number improved significantly (+$26 million) in the March quarter but the company will need a lot more to fund expansion.

Throughout the remainder of the year, similar filings with the SEC will update the condition of the new entity. They're onerous with a lot of buried details. However, if you're a holder of Motorola stock today, you'd better decide if you're going to be a buyer or a seller when this starts trading.
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