Ericsson and Motorola to merge?

Ericsson may be about to bid for Motorola in a giant mega-merger, according to rumours. Details are extremely sketchy, so this should be taken with a pinch of salt at the moment, but there’s huge internal discord within Motorola at the moment, and its recent poor financial performance makes it a real target for its blood-thirsty competitors.

For the first quarter of 2007, Motorola’s mobile handset sales were down 15% from the previous year, and incurred an operating loss of $231 million. This was in stark contrast to Sony Ericsson and Nokia, both of whom enjoyed considerable success with their range of handsets.

Internally, Motorola has been having a battle with Carl Icahn, who owns 3% of Motorola’s stock, and who recently failed in his attempt to win a seat on the Board of Directors at Motorola. Icahn has pulled no punches in his criticism of Motorola’s current management.

Against this backdrop comes the rumour of Ericsson buying Motorola.

In some respects, this makes a lot of sense. Creating mobile phones with great features and that must constantly change to keep pace with the market is hugely expensive. Creating network infrastructure to support these phones (i.e. the bits of kit the mobile operators buy) is also extremely expensive and competitive.

Motorola does both.

In contrast, Ericsson spun off its mobile handset business into the new joint venture with Sony Ericsson, letting Sony’s expertise in consumer electronics drive the new Sony Ericsson mobile phones, while Ericsson continued to focus on the network kit. Nokia, too, have done a similar (though slightly different) deal with Siemens, with Nokia Siemens developing the network kit, leaving Nokia free to focus on handset design.

One criticism that’s been levelled at Motorola for some time now is that its handsets are trailing the market. Its handsets were never technology leaders, but it single-handedly created the designer phone segment with the launch of the RAZR back in 2004. The success of the RAZR kept Motorola’s handset division in the black for years, but it’s not been able to repeat the success, and its new phones just aren’t selling as well..

Add to this increased competition in the designer phone segment from the likes of LG with first its LG Chocolate phone (which sold over 10 million units) and now the LG Shine, plus the Apple iPhone adding pressure, and it’s clear that Motorola simply cannot compete in the designer phone market.

If Ericsson took over Motorola, though, it could restructure the company so that Ericsson-Motorola focused on the network kit, while a spin-off Motorola handset company (MOTOMOBILE?) focused exclusively on handset design.

Of course, all of this is purely conjecture. The rumour comes from analyst Ed Snyder at Charter Equity Research, who has allegedly claimed that two of the main shareholders in Motorola told him that Carl Icahn has spread the rumours about this possible merger. And it’s not like Icahn doesn’t have his own agenda!

Still, no smoke without fire, as they say, and Icahn’s not done with Motorola yet. We’ll keep you posted on further developments.

[Source: Reuters, Evertiq, Motorola]