Motorola Plans to Split Apart

Updated from 10:25 a.m. EDT

Motorola (MOT Quote) said it will split its operations into two separate publicly traded companies, a move that investors hope will be the start of a turnaround for its flagging handset unit.

The company, under pressure by billionaire investor Carl Icahn to do something creative to boost its stock price, had been considering splitting off or selling the handset unit for the past couple of months, but Motorola now says it has made its decision on how best to handle its businesses.

The Schaumburg, Ill., firm said that forming "two industry-leading companies will provide improved flexibility, more tailored capital structures, and increased management focus -- as well as more targeted investment opportunities for our shareholders."

By splintering off its handset unit, the remaining core of the company will consist of a cable set-top box operation, a wireless networking infrastructure business and a security and government services venture.

Based on the current plan, the two companies would be created through a distribution of shares to existing Motorola stockholders. As a result, shareholders will own stock in each of the two in companies. Motorola expects that the separation of its businesses, if completed, would take place in 2009. The company also said it has begun a search for a new chief executive to head up the handset unit.

Shares of Motorola were rising 26 cents, or 2.7%, to $10.02. Rival Nokia (NOK Quote) was off 13 cents, or 0.4%, to $31.46.

The choice to split apart comes two short months after Motorola's initial announcement that it was exploring the possible spinoff of its ailing mobile phone business to accelerate its recovery, something Icahn has long been pressing the company to do.

Earlier this week, Icahn filed a lawsuit against Motorola as part of his continuing proxy battle, asking the company to turn over materials related to the spin-off or sale of Motorola's handset unit, as well as documents relating to use of the company's aircraft.

With competition in the mobile-phone industry intensifying, analysts are welcoming the decision, because it will force the market to assign an appropriate valuation to the parts of the company.

Kaufman Brothers equity research analyst Raimundo Archibold Jr. said Motorola's current share price shows that "the market is placing little to no value on the Mobile Devices business," and that the remaining core business could carry a value between $12 and $14 a share.

Mark McKechnie, analyst with American Technology Research, argues that the remaining business is worth $8 a share, and that the handset division should be valued at $2 a share. However, a separate handset unit will need to attract a solid CEO to recover its footing, he said.

"An ultimate turnaround of the division would likely result in significant returns for longer-term investors," said McKechnie in a research note. "Given time and a new leader, we believe Motorola may be able to turn around its handset business in the 2009/2010 timeframe."

Motorola's ability to manage its brand after a split has been brought into question, although CEO Greg Brown has dismissed the notion. "Our priorities have not changed with today's announcement," said Brown in a statement. "We believe strongly in our brand, our people and our intellectual property, and expect that the Mobile Devices business will be well-positioned to regain market leadership as a focused, independent company."

The next catalyst for Motorola's stock should come on April 24, when it reports first-quarter results. Wall Street expects the company to report a loss of 6 cents a share, according to Thomson First Call.

Fitch Ratings said it will closely monitor the company's financial results, as the firm believes the proposed split will reduce management's focus on the business operations and financial performance over the near term. Fitch added that Motorola has been on rating watch negative since the company first introduced plans for a spinoff in January, and that will continue for the time being.