Yesterday Motorola announced their plans to split the company into two businesses in 1Q2011. Essentially they will create a consumer-focused company with mobile devices and home networking and another company that handles enterprise and government products and services.
We published an analysis of Motorola positioning strategy that we had prepared for the company in advance of their January board meetings to resolve their long term plans for the company. (available via our research library but requires free registration and approval)
In the end the solution that they came up with looks like a it has real potential, especially in the consumer space given what is happening with 1) mobile Internet and 2) Internet TV.
We already can see strong success for MOT in the mobile Internet space thanks to their Android-based strategy and what will be a full stable of winning devices in the smartphone space set to roll out this year. We’ve been talking a bit about Internet TV (see this post from just yesterday) and will soon be rolling out coverage of the “connected car” as it too goes IP.
Motorola will be in a position to do drive some unique innovation in this new set of spaces. Cisco is strong in home networking but is at a disadvantage to Motorola in mobile. Motorola will have a strong and potentially improving position in both which will matter as consumers will expect to be able to do similar things between their mobile and home devices with their myriad content.
The enterprise business will appeal to investors who are looking more for stability rather than growth and should fit well into GARP type portfolios or perhaps value types depending on where it trades as a separate entity post the split. From a coverage standpoint this part of Motorola will not likely be “our cup of tea” so after the split we will focus our efforts on the mobility and home portion of the company.
It’s *way* too early to know enough detail to be precise but based on our very early and rough analysis we have an IV for the mobile/home division of $12.50 and an IV for the enterprise/networks division of $6.25. However even if we are only 1/2 right on the mobile/home division the stock is a double from here.
The gap between the current share price and what we expect exists for two major reasons: 1) Investors are very concerned about the profitability of the new mobile/home networks division based on the history of it at Motorola and the perceived untested nature of Sanjay Jha as the CEO. 2) Motorola has a history of bad management and poor execution during the last ten years or so and some are calling this just more “moving the deck chairs around on the Titanic.”
Our view on the risk reward is favorable due in part to the massive growth in mobile and home Internet which will put a strong wind at the back of Motorola management in this space and the strong net cash position that helps to limit downside from here.
[Disclosure: The R2 Model Portfolio has a long position in MOT as a “special situation.”]