Motorola Cashing in Its Chips - TheStreet

You can't argue with Motorola's (MOT) timing -- for now, anyway.

The big wireless technology outfit ignited an 8% jump in its shares with Monday's

decision to shed its big semiconductor unit. And for once, the company seems to be on the right side of a trend: Though Motorola has been hit hard in recent months by slipups in its core mobile-phone business and management turmoil, it succeeded in floating its latest idea while Wall Street is still

fond of the semiconductor industry.

Under the guise of "unlocking value," Motorola hopes to raise cash and presumably push off some debt through a likely IPO and subsequent spinoff to shareholders. Company executives noted on a Monday morning conference call that the move comes as "chip company valuations are accelerating." Now the question is whether those values will hold as the company rushes through regulatory paperwork amid mounting signs of an inventory glut. Motorola shares rose 91 cents to $13.19.

No Surprise

Following the recent

ouster of CEO Chris Galvin and a botched rollout of some camera phones in time for the holiday buying season, Motorola didn't exactly shock analysts with the timing of the spinoff decision.

After all, the hapless wireless shop could certainly use some more cash and a way to lighten its debt load. As of the second quarter, Motorola had about $8 billion in total debt, and quarterly interest expense of about $165 million. Meanwhile, sales continue to be flat and competition is only mounting.

Selling a business is one of the simplest moves a struggling conglomerate can make in times of need. And Motorola's chip business should have a healthy price tag attached to it. The Schaumburg, Ill., electronics giant books about $4.7 billion, or 18%, of its annual revenue from its chip business, Lehman Brothers analyst Tim Luke estimates.

Noting the valuations of big-chip rivals, Luke estimates Motorola's chip business may be worth as much as $14.5 billion. With rivals like

Texas Instruments

(TXN) - Get Report

trading at around four times 2004 sales and

Intel

(INTC) - Get Report

changing hands at six times top-line estimates, Luke says a three-times sales valuation would fit Motorola.

There's plenty of precedent for the move, including

Lucent's

(LU)

spinoff of its chip business

Agere

(AGRA)

in early 2001.

Still, Motorola execs weren't in a sharing mood. On a conference call with analysts Monday, officials offered no specifics when asked about the planned financial structure, leadership, employee headcount, intellectual property, or even timing of the spinoff. Repeatedly, the executives said those details will be available in the company's prospectus when it is filed with the

Securities and Exchange Commission.

Freedom

Fans say the spinoff would further free Motorola to buy chips elsewhere and similarly open up more sales opportunities for the chip business with other buyers. Also, if chip investors are fickle enough to value the business at roughly half Motorola's market cap, then the company would be foolish not to cash in.

But even if there's some sizzle remaining in the chip market, that may not translate into a lucrative deal. This is Motorola, after all -- the company that decided to stick with analog phones in the mid-1990s as the industry switched to digital. It's also the same outfit that conceived the failed satellite-phone venture Iridium.

And timing is key. The robust communications-chip sales in the first half of the year haven't exactly squared with lowered sales estimates for cell-phone makers. Some see the two trends as

signs of a surplus building. If recent events are any guide, the IPO may come just as the industry starts battling another inventory glut.

"In the end," says Sanford Bernstein's Paul Sagawa, "semi valuations may come down before Motorola can execute the spin."