Getting kicked out of the family business can't be much fun. But at least
soon-to-be-ex-CEO Chris Galvin won't have to deal anymore with pesky shareholders and analysts who think the venerable company should spin off some of its parts.
His successor most assuredly will.
News that Galvin is leaving sparked a mini-rally on Monday, with MOT gaining 97 cents, or 8.75%, to $12.06. It was the day's most heavily traded equity. The unexpected resignation also touched off a flurry of analyst notes upgrading Motorola, saying that investors should welcome his departure. Many analysts raised the issue of a spinoff of one or more of the company's six business units, with the winners of this reverse beauty contest being the unprofitable semiconductor unit and the broadband business.
Motorola's chip business underperformed the sector and Motorola itself," said A.G. Edwards analyst Greg Teets. (A.G. Edwards has no banking relationship with Motorola.)
In the second quarter, MOT's chip group lost $125 million, according to generally accepted accounting principles, on sales of $1.1 billion, an 11% year-over-year decline in revenue. For the first six months of the year, the group reported a GAAP loss of $246 million.
Making matters worse is the company's decline in the overall semiconductor market. Once a leader, Motorola suffered the humiliation in the first half of the year of slipping out of the top 10 IC companies for the first time in decades, says Brian Matas, an analyst with IC Insights, a market researcher.
Selling the entire chip business might be difficult, Matas says. But a sale of one of its most dynamic parts, the microcontroller business, might well be a good fit with a company such as
. "Motorola's IC business hasn't been focused. It's almost like corporate decided to leave it on its own," he said. Unfocused is a word that has been used a lot in the days since Galvin said he was going to quit.
Despite shareholder and analyst pressure to simplify the company, Galvin resisted, saying the six units create a synergy that would be lost if they were separated. Was that a reason for his departure? It may have been, but there were some hints that there was a behind-the-scenes struggle over the pace of a reorganization, not over whether it was necessary.
In any case, the company seems too broad, analysts say, despite the deep cut in headcount under Galvin's watch. "We believe the new CEO will seriously reexamine whether all six divisions belong under the same roof," said J.P. Morgan analyst Ehud Geldblum. "And we wouldn't be surprised to see any of the wireless infrastructure, cable broadband or even semiconductor divisions reconstructed, sold off or spun out," he wrote in a note to clients. J.P. Morgan has an investment banking relationship with Motorola.
Although the broadband business (set-top boxes, cable modems, etc.) earned a $36 million profit in the second quarter, sales were off sharply year over year, declining 26% to $409 million. The company blamed the decrease on cuts in capital spending by cable service providers.
Merrill Lynch analyst Tal Liani upgraded Motorola to buy and also suggested a spinoff of parts of the company. Although he noted that a refocused broadband business could do better since cable operators are loyal to their vendors, he added that "we wouldn't be surprised if Motorola decides to dispose of its cable business given the lack of synergy with its other divisions." Merrill Lynch has had a banking relationship with Motorola.
Liani did one of the more interesting post-Galvin analysis, valuing the company as the sum of its parts on a stand-alone basis. The result: an implied value of $16.70 a share, with a 12-month price target of $15. "We set our price objective on the basis of a future restructuring. However, should the new CEO decide to continue the company's current strategy, this value may not be unlocked," he concluded.