Motorola Solutions Fails To Find A Buyer, What Next?

Motorola Solutions (NYSE:MSI) has failed to find a buyer, according to a recent report by Bloomberg. Several unconfirmed reports had surfaced last month about Motorola Solutions putting itself up for sale. It was reportedly in talks with certain private equity funds and large industrial companies such as Honeywell International and Tyco International, but failed to reach an agreement. There could be several reasons for this, including doubts over the company’s technological advantage in the long run, recent lackluster top-line performance, and seemingly limited opportunities for growth. Owing to the niche market in which it operates and dependence on broader government spending for growth, there seems to be limited meaningful upside potential for the company’s earnings per share (EPS), which declined by 33% (adjusted EPS) last year, in the current scenario. In addition to the limited earnings potential, the fact that there are likely to be very little synergies between any industrial conglomerate and Motorola must be weighing against the latter. The only companies that could show an interest in its acquisition are perhaps defense companies or telecom providers, although the benefits in such cases also are not too obvious. ^[1]

While it is difficult to predict whether Motorola Solutions will continue to hunt for potential suitors in the near term or not, all is not lost for the company if its search draws a blank. In the article below, we discuss the company’s recent performance and its growth drivers, going forward.

We have a $65 price estimate for Motorola, which is about 5% ahead of the current market price.

See our complete analysis for Motorola Solutions here

Lackluster 2014

In 2014, the company’s top line declined by about 6% year over year to $5.9 billion on lower devices and system sales in North America and APME (Asia-Pacific and Middle East) and lower sales in the Services segment. There was a decline in gross margins as well on account of lower margins in North America, lower iDEN sales (which have relatively higher margins) and an adverse order mix in Europe. However, there were some positives to draw from the results as well. Motorola’s selling, general and administrative (SG&A) expenses as well as research and development expenses declined by 11% each year over year on account of the company’s focus on cutting expenses through headcount reductions, consolidation of processes and lower incentive pay options.

Last year, Motorola sold off a major part of its enterprise business to Zebra Technologies for $3.45 billion in cash to focus singularly on its government business. Motorola utilized the opportunity from this sale to restructure and reduce costs in keeping with the difficult business environment. The company cut about $200 million in costs in 2014 and expects to save another $150 million by the end of this year on its cost optimization and cost structure simplification plans. This means that the company’s total operating expenses are likely to come down from about $1.86 billion in 2014 to $1.7 billion by the end of 2015.

While the success in cost reduction and optimization is definitely good news for the company, it is unlikely to help bolster the bottom line considering that Motorola itself expects overall revenue to be flat to down 2% in full year 2015 on account of currency headwinds, which are likely to offset growth across North America, Latin America and the Middle East. Excluding the impact of currency headwinds, sales are expected to grow 1-3% during the year. The expected earnings per share (EPS) for full year 2015 is $3.15-$3.35, compared to Thomson Reuters-compiled analysts’ estimate of $3.35.

Key Growth Drivers

We see the adoption of LTE for public safety use, along with the broader analog-to-digital shift in the U.S. and internationally, as the key drivers of Motorola’s value, going forward. U.S. public safety spending in the coming years will be bolstered by the job creation bill passed in 2012 that reallocated the D Block spectrum for public safety use and provided funding of $7 billion to build out a nationwide network over eight years. We expect Motorola to benefit from the stickiness of its government customers as well as its strong market position and large installed base of security devices, and grab a big chunk of that market, going forward. (Also read Motorola Solutions: A Look At Top Line Growth Drivers For 2015)

There is also a visible shift in the company’s focus towards Services as a line of business. Services currently contribute about 35% of the company’s top line, and we expect this to increase gradually. The company’s Product and Services backlog at the end of 2014 was about $1.2 billion and 4.6 billion, respectively. Motorola expects to recognize 58% of its Products backlog (~$700 million) and 26% of its Services backlog ($1.2 billion) as revenues this year. ^[2]

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1. Motorola Solutions, up for sale, finds no takers, Chicago Business, April 2 2015 [↩]
2. Motorola Solutions 2014 10-K [↩]