Motorola spins-off chip division

Motorola Inc.'s embedded and networking semiconductor business will be separated from the rest of the company's operations and spun off as a new entity, Motorola announced Monday.

Details of the proposed transaction were not provided in a press release Monday. Motorola is considering an initial public offering of its Semiconductor Products Sector (SPS), said Chairman and Chief Executive Officer Christopher Galvin in a release.

Motorola might sell a portion of the division to new investors through the IPO (initial public offering) process, and could distribute the remaining shares to current shareholders as a tax-free transaction, said David Devonshire, executive vice president and chief financial officer during a conference call for media and analysts. The company is required to file a S-1 statement with the U.S. Securities and Exchange Commission that will contain more details of the transaction, but Devonshire set no specific timetable for that filing.

Over the last few quarters, Motorola has undertaken a strategic review of all of its businesses, Galvin said during the call. It has come to the conclusion that SPS would be better off on its own, and that Motorola's existing cell phone and other communications business would benefit from the increased attention once SPS is a separate company, he said.

SPS will be able to expand its product lines and businesses if it has access to public capital, Galvin said in a statement. Motorola also believes the semiconductor industry is starting to rebound, which help drive up the value of the new company, he said.

With the recent run-up in valuations of semiconductor companies, Motorola must feel that it can get more for the division in an IPO than the division is probably worth on its own, said Paul Sagawa, senior research analyst with Sanford C. Bernstein and Co. in New York, speaking after the conference call. Many semiconductor companies are currently trading at valuations far above sales, and Motorola wants to get into that game, he said.

"The dynamics of the semiconductor industry are quite different from that of an equipment company. It's more cyclical, and more capital intensive," Devonshire said during the conference call.

Motorola's SPS division has followed a cost-cutting strategy dubbed "asset-light" by partnering with other companies for research and development and licensing its intellectual property in order to take in additional revenue. The additional cash raised by an IPO will help SPS pursue more business opportunities without having to worry as much about keeping the balance sheet light, Galvin said.

Its business has suffered along with the general downturn that has affected all semiconductor companies over the last two years, but other chip companies have seen increases in sales in 2003. In the second quarter, SPS reported revenue of US$1.1 billion, down 11 percent from the second quarter in 2002.

Intel Corp. increasingly competes with Motorola for cell phone and application processor sales, and plans to move further into those markets. Texas Instruments Inc. has a strong relationship with Nokia Inc., the world's largest cell phone maker and direct competitor to Motorola's own cell phone division.

Current SPS President and Chief Executive Officer Scott Anderson will lead the division through the transition phase, Galvin said. Anderson has been president of SPS only since July, and Galvin shrugged off analyst questions about whether Motorola would look outside the company for a replacement, reiterating Motorola's commitment to Anderson through at least the transition phase.

Galvin himself will soon be looking for new employment. He announced his retirement last month, and the company is currently searching for his replacement.

"My intention is to leave my successor with a formidable platform on which to build what we've been seeking to achieve over the last two years in a difficult environment," he said.

Motorola has been criticized by investors over the past few years for holding onto businesses that didn't necessarily make sense over the long run, Sagawa said. They reacted positively to the news of the deal Monday, sending Motorola's stock (MOT) up 7.4 percent, or $0.91, to $13.19 in morning trading on the New York Stock Exchange.

Motorola will report third-quarter results on Oct. 14.

Update: Added information from a conference call with Motorola.

This story, "Motorola spins-off chip division" was originally published by PCWorld.

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