Sunday, December 16, 2007

Motorola, Palm, and UTs PCD

I was reading the Thursday edition (12/13/07) of the Wall Street Journal and came across a couple of articles regarding Motorola and Palm that were related to UT's PCD and the company in general.

UT has designated the personal communications division (PCD) as none-core and the consensus is this will be sold off/spun off in the future to generate cash and refocus the company to its core networking divisions. During the shareholder meeting, some shareholders asked Hong Lu why it even bought the PCD back in 2004. Hong gave a quick history and mentioned that UT was the biggest handset maker in China previously and that they could leverage the Audiovox division and their own division. A fellow shareholder Nawar has given a good historical perspective on the PCD performance the last few years:

Anyway, how much can the company get for this division if it were to sell it? Here is a base reference from their 2004 purchase: Based on rev/margin improvements, people are speculating that it could bring in $200-300m or more.

Here is where the Motorola article comes in. Carl Icahn has amassed a 3.3% holding in Motorola and wants to sell Motorola's handset division to release shareholder value (sound familiar :-). Based on Icahn's estimates, the handset division is being valued at $0 right now but should fetch one times yearly revenue of $20billion. Nokia is trading at about 2x yearly revenue. Analysts actually agree with Icahn but notes they have to fix certain problems before it can yield the desired value. The valuations (1x-2x revenue) are not applicable to UTs case because the majority of its handsets are resale/distribution and they don't have anywhere near the margins or brand recognition of Motorola or Nokia. In any case, the takeaway is even Motorola's handset division may be for sale.

There is also the confusion about UTs PCD because it has its own internally designed phones with higher margin and expenses plus the distribution part with higher rev/low expenses. Based on conversations with Barton/Blackmore, my impression is there is no immediate sale and that if any sales comes about, it will only be the distribution part. Let me say that this is just my feeling and I could be way off. Other knowledgable posters may shed more info if this makes sense or not. Anyway, even with the Motorola sale, there is the added problem of the current credit markets. The good thing for UT is that they are the smaller sized handset provider so it is more affordable and anyone that picks up the Motorola handset may just make a clean sweep to eliminate competition. Also, other smaller players that produce generic handsets can decide they only want UTs distribution portion.

What about the Palm article? Palm recently hired Apple's "podfather" Jon Rubinstein to revamp their own operations. Ruinstein has been on the job since July and has been putting in 70-hour weeks (Blackmore came in at the same time). I believe Palm is even in worse situation than UTStarcom. They have less share in their markets, as strong competition as any (heard of Apple and Research in Motion), and have declining revs/demand for their own products (their share of the smartphone market has gone down from 5.4% to 3.6% ouch!). It will also take them 18 months to develop new phones from scratch! UT on the other hand is incresing revs in India, iptv, and other lines of businesses.

One positive about Rubinstein is that 1 million of his stock options are tied to the company's stock hitting 50 to 200% above their grant date. This sounds good from a shareholder perspective but it didn't say how many OTHER options/shares/compensation he got. Anyway, both are turnaround stories but it seems to me UT has a larger chance to turn it around just based on their more diverse businesses, explosive growing and target markets. They have a larger expense ratio so there is that risk but that can be cut anytime as things change.

Another final take away is that other companies are not doing well also. This doesn't fully excuse management's performance but it is a tough environment that they have to navigate through. I feel UTs chances are very good for a turnaround given that they have been doing this for years now and have maintained or increasing their market share even now. A lot of UTs competitiors are also pulling back from certain markets while Nokia, Apple, and Research in Motion continue to assault Motorola and Palms markets. Anyway, its some consolation and things to think about.

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