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Struggling mobile phone manufacturer Motorola Inc. will split itself into two separate entities in January 2011. Previously, Motorola expected the split to be completed in the first quarter of 2011.

Motorola’s spin-off has been in progress since early 2008. The company decided to split its Mobile Devices and Home Division as Motorola Mobility (which will sell mobile handsets and television set-top boxes) and the Enterprise Mobility Solutions and Networks businesses as Motorola Solutions (which will supply wireless technology to governments and enterprises).

Motorola has incurred losses of about $5 billion over the past three years, due to weakening sales. During third quarter 2010, Motorola had $8.99 billion in cash and investments. Total debt at the end of the quarter was $3.4 billion.

Motorola sold most of its telecom infrastructure businesses to Nokia Siemens Networks, a 50-50 joint venture between Nokia Corp. (NOK - Analyst Report) and Siemens AG , for $1.35 billion, which will help Nokia Siemens strengthen its network infrastructure business in the U.S. CDMA market.

In order to regain its market share, Motorola has been trying to slash expenses and develop new smartphones. Motorola launched Droid, Droid 2 and Droid X based on Google Inc.'s Android 2.2 operating system offering Adobe Systems Incorporated's (ADBE - Analyst Report) Flash Player 10.1 software. These handsets are being sold through Verizon Communications Inc. (VZ - Analyst Report) outlets.

Motorola also introduced 22 new smartphones in the last quarter, namely, Bravo, Citrus, Defy, Droid Pro, Flipout, Flipside and Spice. All the devices are targeted at cost-conscious customers, with Droid Pro being the most prominent. 

Motorola faces stiff competition from Research in Motion Ltd.’s Blackberry, Apple Inc.’s (AAPL - Analyst Report) iPhone and Nokia’s Symbian operating system based smartphones. Despite this, during third quarter 2010, Motorola shipped 9.1 million mobile phones including 3.8 million smartphones. This is a considerable improvement over the shipment of 2.7 million smartphones in the previous quarter.

We are highly optimistic about Motorola’s rejuvenated smartphone business betting on the Android software. We believe the proposed split-off of the company will also help add more value to the mobile devices segment.

However, it remains to be seen how Motorola faces the challenge from Apple once Verizon Wireless, which significantly promoted the DROID portfolio of Motorola, starts selling the legendary iPhone 4. Thus, we maintain our long-term Neutral recommendation for Motorola.

Although Motorola shows huge sequential growth in its 3G smartphones business, in absolute terms, the device shipment is far behind Apple’s iPhone shipment and Research in Motion’s BlackBerry devices shipment. We do not expect Motorola to reach anywhere near them in the immediate future. Currently, it is a short-term Zacks #4 Rank (Sell) stock.

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