Motorola

Motorola is a legendary American technology company that serves as a classic case study for Value Investing practitioners on how immense value can be unlocked by breaking up a complex business. Once an innovation powerhouse—giving the world everything from the first car radio to the first words from the Moon and the iconic mobile flip phone—Motorola eventually became a bloated conglomerate. It housed two vastly different businesses under one roof: a stable, high-margin professional radio business and a hyper-competitive, capital-intensive mobile phone division. This created a drag on its stock price as investors struggled to value the disparate parts. The company's 2011 spin-off into two separate entities is a textbook example of how splitting up a company can reveal the true worth of its underlying assets, making it a pivotal story for any investor learning to spot hidden value.

The story of Motorola’s breakup is more than just corporate history; it's a perfect lesson in identifying and releasing trapped value. It shows what can happen when a great business is shackled to a struggling one.

In its heyday, Motorola was the gold standard for quality and innovation. However, by the 2000s, it had lost its way. Its mobile phone division, once a leader, was being crushed by newcomers like Apple's iPhone and Samsung's smartphones. Meanwhile, its other major division, which made mission-critical two-way radios and communication systems for governments and public safety organizations, was a fantastic, stable, and profitable business. The problem? Wall Street viewed them as one messy company. The massive losses and uncertainty of the mobile phone business completely overshadowed the quiet, consistent success of the professional radio business. This situation is a classic example of a conglomerate discount, where the stock market values a company at less than the sum of its individual business units because of complexity and a lack of focus. Imagine a garage containing both a priceless antique car and a pile of junk; if you have to buy the whole garage, you'll offer a low price because of the junk.

This type of situation is a magnet for an activist investor. In this case, billionaire Carl Icahn took a large stake in Motorola and began advocating forcefully for a breakup. His argument was simple: the two businesses had nothing to do with each other and were, in fact, harming each other. Separating them would allow each management team to focus on its own strategy, and it would let investors value each business on its own merits. The goal was to force management to take actions that would maximize shareholder value, rather than preserve the corporate empire.

In 2011, Motorola finally split into two independent, publicly traded companies:

• Motorola Solutions (MSI): This was the “crown jewel.” It kept the stable and highly profitable business of providing communication equipment and services to government and enterprise clients. Think police radios, command center software, and video security. This business has a powerful competitive advantage due to its established relationships, high switching costs, and mission-critical reliability.
• Motorola Mobility (MMI): This was the “problem child.” It took the volatile and fiercely competitive consumer mobile phone and television set-top box businesses. It was burning cash and fighting a losing battle in the smartphone wars.

The spin-off worked exactly as value investors had hoped. Once separated, the market could finally see the two businesses clearly. Motorola Mobility, the handset maker, was acquired by Google in 2012, primarily for its vast portfolio of patents, which Google needed to defend its Android operating system. This provided a quick, profitable exit for shareholders who held onto the MMI stock. Google later sold the handset manufacturing business to Lenovo in 2014. Motorola Solutions, free from the drag of the consumer division, thrived. Its stock became a darling of investors who appreciated its steady growth, wide moat, and strong cash flows. The company focused on what it did best and has delivered outstanding returns for shareholders since the split.

The Motorola saga offers timeless lessons for the everyday investor on how to find opportunities the market might be overlooking.

• Breakups Create Value: Spin-offs are one of the most powerful catalysts in finance. When a company splits up, it often forces the market to re-evaluate the true worth of the individual pieces.
• Look for a Hidden Gem: Be on the lookout for good companies trapped inside mediocre or complex ones. Sometimes, a company's stock is cheap because one bad division is obscuring a fantastic, durable business.
• Think in Pieces: When you analyze a company with multiple divisions, ask yourself: “What would these businesses be worth on their own?” This is the foundation of a sum-of-the-parts analysis. If the pieces are worth more separately than the current stock price implies, you may have found a bargain.