Figuring it's time to get in on the IPO action, Motorola (MOT) on Wednesday moved ahead on a plan to cash in its chip business.
Just a day after it
handed Ed Zander the reins, Motorola filed a prospectus with the
Securities and Exchange Commission
announcing its intention to carve out its semiconductor unit -- tentatively named SPS Spinco -- in a $2 billion IPO.
The Schaumburg, Ill., tech giant is in the middle of a business retooling process after three years of slack demand and management blunders that helped turn the once-dominant wireless gearmaker into an
often laughable industry laggard. The company has said it wants to focus more on its handset business. Now many observers expect that other parts of the business, such as its wireless infrastructure unit, will also be jettisoned. On Wednesday, Motorola slipped 14 cents, to $13.19.
On an introductory conference call with analysts Tuesday, Zander said it was too early to comment on whether more restructuring is needed. The executive said yesterday that he envisioned turning the company's performance up rather than turning the tech giant around, though he hedged on how he'd do that.
The company said it expects the spinoff of the chip business to be complete sometime next year. After the public offering of Class A shares, the company says it will distribute its entire stake of Class B stock to Motorola shareholders.
Motorola's decision to push ahead with the public offering is yet another sign that the IPO market is starting to heat up. This week has been one of the biggest in years for IPOs. Chinese insurer
soared 31% on its first day of trading after its $3 billion offering Wednesday. And travel broker
rose as much as 15% in its debut Wednesday.
Some 20 IPOs were slated to launch in December. That's double the number in the first half of the year alone and the busiest month in three years.
One of Motorola's five divisions, the chip unit represents about $4.7 billion in projected sales this year. That's 18% of Motorola's business, according to analysts. But sales have been dropping for the past three years, and while the unit has been narrowing its losses, it remains a drag on the company's bottom line. It lost $400 million in the first nine months this year, against $1.8 billion for all of last year.
Typically, companies spinning off subsidiaries refer to the process as unlocking value. Presumably, once the business is independent, Motorola rivals will be more inclined to buy chips and components from the company. But according to the prospectus, about 28% of the chip unit's sales in the latest year were to Motorola. That makes the corporate parent the company's largest customer by far -- though it hardly makes clear that the relationship hindered other buyers.
Sharp as a Tack
In any case, few analysts argue that Motorola should keep the chip business, and most see the IPO as a wise move enabling Motorola to sharpen its efforts in the handset market.
"I think it has potential to make both the handset business and the semiconductor business more responsive to the market," says Pacific Crest Securities analyst James Faucette, who has a buy rating on the stock. His firm has no underwriting ties to Motorola.
bumped Motorola from the top handset-maker spot a few years ago, and since then the company has been less and less effective against fast-growing rivals such as Korea's
Motorola has repeatedly been hit by delays on new phone models. This fall, Motorola was late with its camera phone, just as that trend took off for this holiday season. Then, when the phone finally arrived, a component shortage made its stay brief.
The gaffe is likely to have cost Motorola a significant number of cell-phone sales and a few percentage points in its No. 2 market-share position.
But Pacific Crest's Faucette is optimistic that new leadership and a leaner operation will prevent repeats of past mistakes.
"All the pieces are there for Zander," says Faucette. "The thing Zander will have to focus on, or at least what the analyst community hopes he focuses on, is execution and getting handsets to the market in time."
Sounds like a good start.