BREAKINGVIEWS-Motorola: the breakup that keeps on giving

Mon Sep 17, 2012 8:23pm IST

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(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

By Robert Cyran

NEW YORK, Sept 17 (Reuters Breakingviews) - Motorola has been the corporate breakup that keeps on giving. Splitting in two early last year resulted in Google (GOOG.O) buying its cellphone operations for a chunky premium. Motorola Solutions (MSI.N), its emergency communications arm, has done even better. Moreover, the $14 billion company looks poised to buy back a third of its stock without much strain.

The early 2011 split was a textbook example of the benefits of corporate focus. Motorola Mobility held large numbers of patents in mobile computing as a result of the company’s long history in phones. This focused firm became an attractive prize in the battle to create the dominant standard for smartphones. Google snatched it up for $12.5 billion.

Motorola Solutions’ stock is up nearly 40 percent since the split. The company run by Greg Brown, along with rival Harris (HRS.N), has a lock on the business of building emergency communications systems for local and state governments. These clients are reluctant to try new vendors, and equipment must be backward-compatible. That business is expanding slowly, but Motorola also makes mobile systems for companies like UPS (UPS.N) and FedEx (FDX.N), an area which is growing faster. Overall, the company reckons it will increase revenue by about 7 percent annually over the next few years, and it’s on track to throw off about $1 billion of free cash flow this year.

While Motorola isn’t especially cheap at 14 times estimated 2013 earnings, it has lots of cash to distribute to investors. Moreover, it has a good record of doing so. It has been steadily reducing its hoard by repurchasing stock, buying back about $3 billion so far. Yet it still has $3.7 billion of cash on hand, and less than $2 billion of debt. Motorola says it needs about $1.5 billion to run the business, but it plans to eventually have more debt than cash, and to continue returning about 30 percent of cash flow via dividends.

But it could still do more. It could, for instance, borrow to buy back $5 billion of its stock, or more than a third of outstanding shares. That would leave the group with around $5 billion of debt, which is supportable. True, running a company with more debt requires more disciplined management. But with activist investor ValueAct Capital, no stranger to seeking board seats, owning about 10 percent of the stock, Motorola Solutions shareholders are likely to receive precisely that.

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CONTEXT NEWS

- Motorola split into two companies in January 2011, cellphone maker Motorola Mobility and Motorola Solutions, the company’s operations in emergency communication and mobile computing for enterprises.

- Google acquired Motorola Mobility for $12.5 billion in August 2011. Motorola Solutions stock is up 38 percent since the spinoff.

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(Editing by Rob Cox and Martin Langfield)

((robert.cyran@thomsonreuters.com)) Keywords: BREAKINGVIEWS MOTOROLA/

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