Motorola's Spin-Off of Its Cell Phone Business
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For the exclusive use of P. Sun, 2017. ID# CU129 PUBLISHED ON FEBRUARY 23, 2012 Motorola’s Spin-Off of Its Cell Phone Business BY KATHRYN RUDIE HARRIGAN* Introduction In March 2008, Motorola, Inc. announced that it would split itself into two publicly traded companies by spinning off its unprofitable mobile devices handset unit in a tax-free distribution to its shareholders. The spin-off was, in fact, postponed until January 4, 2011, as Motorola prepared for this momentous strategy change. The core of Motorola was renamed Motorola Solutions, Inc. (MSI) while the divested cell phone company was called Motorola Mobility, Inc. (MMI). At the time of its announcement, the cell phone business was the largest division of Motorola (52% of its sales), with $18.9 billion in net sales in year ending December 31, 2007, (a 33% decline from year ending December 31, 2006) and a loss of $1.2 billion (see Exhibit 1). Motorola’s money-losing and notoriously volatile phone business was in such bad shape that the unit attracted doubts about whether it could survive on its own.1 The other Motorola businesses were profitable (including Motorola’s enterprise solutions and public safety units, as well as its telecommunications infrastructure and cable set-top receiver equipment businesses). Unfortunately, neither of the company’s two profitable divisions—the home and networks mobility segment nor the enterprise mobility solutions segment—enjoyed the growth prospects that excited Motorola’s investors the way its cell phone business did. TABLE 1. MOTOROLA, INC. NET SALES. Year Ended December 31 (Dollars in millions) 2008 2007 2006 Mobile Devices $12,099 $18,988 $28,383 Home & Networks Mobility $10,086 $10,014 $9,164 Enterprise Mobility Solutions $8,093 $7,729 $5,400 Author affiliation Copyright information *Henry R. Kravis Professor of Business Leadership, Columbia © 2012 by The Trustees of Columbia University in the City of New Business School York. Acknowledgements This case is for teaching purposes only and does not represent an Aimee Picchi provided additional research support for this case. endorsement or judgment of the material included. This case cannot be used or reproduced without explicit permission from Columbia CaseWorks. To obtain permission, please visit www.gsb.columbia.edu/caseworks, or e-mail [email protected] This document is authorized for use only by Pang Sun in Competing in Technology Industries taught by H. Dennis Park, Drexel University from January 2017 to June 2017. For the exclusive use of P. Sun, 2017. Motorola’s 2008 spin-off announcement raised a barrage of questions about how the company expected to disentangle its businesses. 2 Motorola did not disclose whether the brand and batwing logo—arguably the handset division’s most valuable assets3—would follow the mobile devices segment or stay with the core company. (Motorola’s brand name and batwing logo were as widely recognized among industrial and enterprise customers as they were among residential consumers.) Similarly Motorola’s vast treasury of patents—held at the headquarters level—benefited many of its family members in 2008 and could not be easily assigned to a single line of business because the patents affected technology used by all of its businesses.4 Dividing assets and resources among Motorola’s highly related segments was a daunting task. The cell phone division shared intellectual property, procurement, human resource management, computer systems and software, factories, procurement personnel, information systems, and other administrative services with Motorola’s other communications businesses. Motorola’s Illustrious History Motorola, Inc. was a much-admired American icon that had been showcased during the 1990s as a “Built to Last” firm. 5 From its midwestern headquarters in Schaumburg, IL, Motorola’s web page reflected the entrepreneurial enthusiasm of its organization: We are scientists. We are artists. Most of all, we are a global communications leader, powered by, and driving, seamless mobility. Motorola is revolutionizing broadband, embedded systems and wireless networks—bringing cutting-edge technologies into your everyday life, with style.6 Over its 80-year history, Motorola’s science labs had created an astonishing array of visionary networking concepts, next-generation communications devices, and a variety of ingenious solutions to complex communications problems (see Exhibit 2). Motorola had amassed a huge treasury of patented technology, but few of its amazing discoveries were easily commercialized. Preferring to “bet the company” on big projects instead of culling through its war chest of technology systematically to produce smaller, incremental products, Motorola had repeatedly flopped in the marketplace—especially in recent decades.7 RADIOS TO MICROPROCESSORS TO COMMUNICATIONS EQUIPMENT Entrepreneur Paul Galvin started his first business as a popcorn vendor when he was 13 years of age. In 1928, at age 33, he founded Galvin Manufacturing in Chicago to make battery eliminators, so early radios could run on household current instead of batteries. The following year Galvin began making car radio receivers and trying to develop a mobile radio for the police. In 1940 the company developed the first handheld, two-way radio for the US Army. Motorola went public in 1943 at $8.50 per share. What became Motorola Solutions was built on the customization of two-way communications systems for critical-use applications. Motorola exited from its founding business as it made its last car radio in 1987. Motorola’s Spin-Off of Its Cell Phone Business | Page 2 BY KATHRYN RUDIE HARRIGAN* This document is authorized for use only by Pang Sun in Competing in Technology Industries taught by H. Dennis Park, Drexel University from January 2017 to June 2017. For the exclusive use of P. Sun, 2017. THE ONCE-DOMINANT MICROPROCESSOR DESIGNER In 1947 Paul Galvin renamed his company Motorola (which means “sound in motion”) after its car radios. In the late 1950s Motorola started making integrated circuits and microprocessors—moving beyond its automotive industry mainstay. As the dominant producer, Motorola microprocessors were designed into the first Apple computers in the 1980s. (At that time Intel was a fledgling start-up from whom IBM bought microprocessors because Motorola’s production capacity was completely sold out.) When Paul Galvin died in 1959, his son Robert became CEO. The company’s purchase that year of a hospital-communications-systems maker led it to produce some of its first pagers, and eventually Motorola became a leader in one-way paging systems. The paging product line was added to Motorola Solutions because it involved creating high-reliability communications systems for critical-use applications. In 1974 Motorola introduced its first 8-bit microprocessor, the 6800, which was used in automotive, computing, and video-game applications. In 1979 Motorola introduced its widely popular, 16-bit MC68000 microprocessor which powered Apple’s Lisa and Macintosh home computers. In 1985 Motorola’s 32-bit MC68020 microprocessor powered the popular Unix supercomputers. 8 Because Motorola licensed its MC68020 design widely to other manufacturers, at one time there were far more MC68020 microprocessors embedded in computing equipment than there were Intel Pentium processors. In 1991 Motorola collaborated with Apple and IBM to develop their 64-bit PowerPC microprocessor chips; the PowerPC consortium was formed as a competitive counter to the increasing market power of Microsoft and Intel in computing.9 In 1998 Motorola recorded its first $2 billion restructuring charge, which contributed to a reported loss. The last vestiges of the PowerPC microprocessor alliance evaporated that same year when Motorola and IBM announced plans to work separately on the technology, thereby ceding logic chip dominance to Intel.10 Its share of the alliance’s microprocessor technology became a part of Freescale Semiconductor, which was subsequently spun off to shareholders by Motorola. THE PACE OF TECHNOLOGICAL CHANGE EXPLODES Motorola began to grow by acquisition as the pace of technological progress outpaced its internal ability to innovate. As the company grew in this fashion, critics complained that Motorola never integrated its acquired businesses adequately—leading to increasing tension among its business units and an inability to sustain a stream of industry-leading products because personnel never applied the acquired technologies serendipitously to ongoing lines of business.11 In particular, critics charged that Motorola’s CEOs failed to provide processes for instilling its much-admired, “Built to Last” culture12 into acquired business segments.13 We are a global communications leader powered by a passion to invent and an unceasing commitment to advance the way the world connects. Our communication solutions allow people, businesses, and governments to be more connected and more mobile.14 Page 3 | Motorola’s Spin-Off of Its Cell Phone Business BY KATHRYN RUDIE HARRIGAN* This document is authorized for use only by Pang Sun in Competing in Technology Industries taught by H. Dennis Park, Drexel University from January 2017 to June 2017. For the exclusive use of P. Sun, 2017. Motorola entered the data-communications hardware market by acquiring Codex (1977) and Universal Data Systems (1978). In 1990 Motorola organized the 66-satellite Iridium communication system for sending wireless communications from anywhere in the world (which went online in 1998).15 In spring