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Motorola shows the value in corporate breakups

Motorola’s splitting in two early last year resulted in Google buying its cellphone operations for a chunky premium. Motorola Solutions, its emergency communications arm, has done even better.


Motorola has been the corporate breakup that keeps on giving. Splitting in two early last year resulted in Google buying its cellphone operations for a chunky premium. Motorola Solutions its emergency communications arm, has done even better. Moreover, the $14-billion (U.S.) 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 per cent since the split. The company run by Greg Brown, along with rival Harris, 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 such as UPS and FedEx, an area which is growing faster. Overall, the company reckons it will increase revenue by about 7 per cent annually over the next few years, and it's on track to throw off about $1-billion of free cash flow this year.

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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 per cent 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 company 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 per cent of the stock, Motorola Solutions shareholders are likely to receive precisely that.

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