Motorola Gives Mobile Phone Unit Spin-Off Details

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Struggling mobile phone manufacturer Motorola Inc. (MOT) intends to invest $3.5 billion into its mobile-phone and set-top box units that will be spun off in the first quarter of fiscal 2011.

The money will be used to manage and build the business and make acquisitions. The Motorola Mobility unit is applying for a separate listing on the New York Stock Exchange.

Motorola has incurred losses of about $5 billion, over the past three years, due to weakening sales. As of July 3, 2010, Motorola had $8.33 billion in cash and investments. Total debt at the end of second quarter 2010 was $3.9 billion.

Motorola’s spin-off has been in progress since early 2008. The company decided to split its Mobile Devices and Home Division as Motorola Mobility and the Enterprise Mobility Solutions and Networks businesses as Motorola Solutions.

Recently, Motorola agreed to sell its telecom unit to Nokia Siemens Networks, a 50-50 joint venture between Nokia Corp. (NYSE:NOK) and Siemens AG (SI), for $1.2 billion. The deal will help Nokia Siemens strengthen its network infrastructure business in the U.S.

Although Motorola shows a huge sequential growth of its 3G smartphones, in absolute terms, the 2.7 million device shipment is far behind Apple Inc.’s (NASDAQ:AAPL) iPhone shipment of 8.4 million and Research in Motion Ltd’s (RIMM) 11.2 million BlackBerry devices shipment. We do not expect Motorola to reach anywhere near those figures in the immediate future.

Nevertheless, Motorola started showing signs of a turnaround with soaring net profit in the second quarter 2010. In addition to smartphones, the company is continuously introducing innovative products for enterprise mobility and public safety solutions.

After the success of Droid, Motorola launched Droid 2, which is an enhanced version of Droid and Droid X with double the speed and memory of the original Droid phone. It is based on Google Inc.'s (NASDAQ:GOOG) Android 2.2 operating system offering Adobe Systems Incorporated's (NASDAQ:ADBE) Flash Player 10.1 software and is being sold through Verizon Communications Inc. (NYSE:VZ) outlets.

We believe effective cost control measures, massive demand for wireless broadband services and newly introduced high-end 3G smartphones will support the stock price in the near term. However, we do not foresee any above market gain for the stock in the near future. We thus maintain our long-term Neutral recommendation on Motorola. It is currently a short-term Zacks #3 Rank (Hold) stock.