Motorola Needs Help -- Duh! but Can Siemens Give It?

Its need for an infrastructure partner seems obvious, but the best fit isn't clear.
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Motorola

(MOT)

kicked off the guessing game

back on July 30, the night before its management met with analysts, when executives acknowledged the tough times ahead for the mobile-communications company's infrastructure business. With little in the way of third-generation wireless business -- most of the initial contracts were snapped up by

Ericsson

(ERICY)

and

Nokia

(NOK) - Get Report

-- Motorola could need a partner.

Today, a potential match surfaced in German communications giant

Siemens

(SI) - Get Report

. Wall Street is not convinced that Siemens is the best candidate to team with Motorola, but the idea refuels speculation that Motorola is window-shopping for help on the equipment side of its business.

Wall Street has followed the potential for tandem efforts between Motorola and Siemens, as well as Motorola and

Nortel

(NT)

for months. "Motorola has been talking to every possible partner. I do think we'll see something happen in the next quarter or two; it's not necessarily going to be Motorola and Siemens," says Sam May of U.S. Bancorp Piper Jaffray. "Also, I don't think this would be the end of potential joint ventures or disposals of assets. This is just the beginning."

Motorola could use some help with its infrastructure business, which has faced insults that range from it being unsuccessful to totally irrelevant in the current market. The company offers a solid lineup in the CDMA equipment realm, and a good presence in Asia and the Americas. As for a Siemens' hook, the German wireless-equipment company is strong in GSM infrastructure for Western Europe, as well as in 3G contract signings, both sore points for Motorola.

"In a market that is slowing down to single-digit growth rates year over year, a joint venture can be a hedge against having to exit the market altogether," says Gartner Dataquest analyst Bryan Prohm. "It allows two second-tier companies to streamline their portfolios and focus on a return to profitability by partnering with those with different areas of strength."

Bear Stearns analyst Wojtek Uzdelewicz points out some initial hitches to a partnership plan. He maps out Motorola's equipment partnerships with

Alcatel

(ALA)

and

Cisco

(CSCO) - Get Report

, along with Siemens' links to

NEC

for infrastructure, as elements that make a joint effort more of a five-party tangle. "Nortel probably makes more sense because there's less of an overlap," Uzdelewicz says, adding that two North American companies might have an easier time working together. But he agrees that Siemens also makes sense because "it has decent market share for W-CDMA wins, much larger market share in 3G wins than Motorola."

Prohm says the same types of gaps could be filled on the handset side, where Siemens has been beefing up efforts for years and Motorola is working its way back from losing the dominant worldwide market share of five years ago. "From a handset perspective, if you take a No. 2 and a No. 4, together they become a pretty potent challenger to Nokia if a deal is signed. Even independently, Motorola and Siemens are among the more notable OEMs."

Motorola has staged a revival in recent quarters under the tutelage of Personal Communications Sector head Mike Zafirovski. PCS staged a few percentage-point gains in the second quarter to get to 14.8% worldwide market share, according to Gartner Dataquest. Siemens' mobile-phone business runs a slim No. 4 behind Ericsson with 7.9% to the Swedes' 8.3%. Both companies are struggling in the constrained spending environment of 2001, with Motorola's PCS unit losing $237 million on $2.5 billion in sales in the second quarter. Siemens' Information and Communication Mobile unit had negative earnings before interest, amortization and taxes of $434 million in the second quarter on $2.16 billion in sales.

Wall Street is more than a little skeptical of joint ventures, given the failed matchups of

Lucent

(LU)

and

Philips

(PHG) - Get Report

, as well as

Sony

(SNE) - Get Report

and

Qualcomm

(QCOM) - Get Report

, among others. Today's speculation coincides with the first working day at the Ericsson and Sony joint venture announced in April, Sony Ericsson Mobile Communications. Back in the spring, Ericsson decided to take drastic measures to stop its money-losing mobile-phone unit from weighing on its share price and its books by spinning it out and joining it with Sony's handset arm. Ericsson had 8.3% market share in the second-quarter worldwide and Sony has very small share outside Japan, and the move was applauded by investors.

One Motorola fan and hedge fund analyst was not nearly so excited about Motorola potentially separating off its infrastructure and handset business. With Motorola hypothetically pared down to its troubled chip business and its cable infrastructure segment, he suggested it would be worth only $5 of its afternoon trading price of $15.17.