Could Nortel provide the answer to Motorola’s mobile woes? Asks a piece in the Wall Street Journal this week. Well the short answer is no, but let’s take a look at the long answer.
Executives circling the stands at Mobile World Congress in Barcelona were all of the opinion that this was like tying two anchors together to see if they float, and yet there is some logic.
Nortel is strongish in CDMA infrastructure, so is Motorola. Both are weakfish (very) in UMTS, which in its next generation LTE, is threatening to become globally dominant, with the Qualcomm owned CDMA technology market shrinking somewhat, as evidenced by Verizon’s long term aim to go Long Term Evolution from CDMA and Sprint’s to go to WiMAX.
Both Motorola and Nortel have WiMAX operations, with Motorola’s somewhat more successful so far with big wins at’wait for it’ Sprint, the only telecommunications business that has made more mistakes than Motorola recently. The similarity of WiMAX to LTE (both use an OFDMA cluster of carriers) will give a good head start to both companies, and there would be economies of scale, and big reductions in headcount as they eliminated overlap. But it is the leadership of both companies that have managed to miss out on markets like UMTS, that leads us to worry. Where would the originality and spark come from? Part of the reason for that is that Nortel is ‘old school’ and still has lots of Core technology, which moves along at a pedestrian rate and is not so profitable as other parts of communications.
So okay, let’s say that with the right treatment the telecommunications infrastructure business of Motorola could be sold to Nortel, or could be floated to the shareholders to relieve the stress being created by the handset division, and then find its own value in the market and then partner or merge with Nortel on reasonable terms. To our way of thinking that’s a company still called Nortel, and there are two other divisions that Motorola has, with the handset division dragging them both down.
The same treatment could be considered for government and enterprise, and for connected home, and we are sure that the government and enterprise stuff would struggle along for a while and then get snapped up by someone, at a decent value, who is in the same business ‘ just so that it scales.
The connected home though is another matter. It has around 50% of the cable set top business in the US and has, during the past two years, started a strong assault on IPTV in Europe. But with its main rival, Scientific Atlanta, in the hands of Cisco, and with the FCC finally separating set tops from the encryption mechanism that drove sales with its CableCard initiative, there is the potential for Motorola market share to slide in the US in the coming year or two ‘ perhaps offset by gains in Europe.
Fundamentally these businesses are good and they don’t deserve to be dragged down by the failure of the personal devices handset division. But truly it is the fate of that division that decides he fate of all the others.
Who is going to buy the handset division ‘ private equity would normally be the most likely, but debt is tight in the US right now to fund such a deal and no-one could be found to take a piece of this proposed merger with Nortel for the infrastructure divisions, which is a far smaller piece of cake to bite off. Sony Ericsson has been making noises for a few years about growing US market share ‘ Nokia has put itself out of the equation, and Alcatel has enough losses to be going on with, without re-entering the handset market. Everyone is looking at the Chinese, but there would be barriers here.
In the end, if the handset business is not sold, then either Motorola is left alone for two years to sort out its mess, or it could be helped by an outsider which partners and takes part of the handset business. If that happens, it might benefit from the scale of keeping all the other three divisions.
Whatever happens a Nortel Motorola tie up only solves the problems at a very small part of Motorola, and it’s not enough for shareholders to get their money back.