Following a two-month review of its business model, Motorola Inc announced plans this week to spin off its struggling mobile phone business to create two separate publicly traded companies in 2009.

The Schaumburg, Ill.-based company had come under pressure from activist investor Carl Icahn, who insists Motorola would do better for its shareholders by splitting up. Icahn said the move was clearly a step in the right direction to the company's board in a letter. Chief executive Greg Brown said on a conference call Wednesday that having two independently traded companies would unlock value for shareholders.

The handset company will operate separately from a company that will include the home and networks business which sells TV set-top boxes and modems, and an enterprise unit that sells computing and communications equipment to businesses.

Brown agreed with Icahn that the main problem facing the company was its inability to introduce new products to replace the once-popular Razr phone, which boosted its handset division and held a top position from 2005 to 2006, but has stumbled since amid stiff competition. Apple and its popular iPhone, for example, have captured the attention of buyers in the high-end market.

In 2007, the company pulled back from developing markets, cutting 7,500 jobs as CEO Ed Zander resigned, putting the company in a delicate position.

Motorola's influence and stock price have declined as rivals have taken the lead in creating appealing devices.

I think the challenges around Motorola have been about consistent execution, Mr. Brown said. That is why it is so important for us to expand and improve our product portfolio.

Motorola said it hopes the transaction will be tax-free, allowing shareholders to own stock in both new companies. If the deal is approved, the two units would be separated in 2009.

Our priorities have not changed, Brown confirmed. We remain committed to improving the performance of our Mobile Devices business by delivering compelling products that meet the needs of customers and consumers around the world.

Brown said Motorola will search for a new chief executive of the Mobile Device business as it works to regain favor with customers and its No. 2 position in the cell phone market. It lost that spot last year to rival Samsung Electronics Co. Finland's Nokia Corp. is the industry leader.

Business is bad but expected … progress towards a split should help the shares, said Jeff Kvaal, an analyst at Lehman brothers.

However, other analysts noted that Motorola's problem is not about managing the size of the company, but discipline.

Every time they go back to the drawing board, they start talking about selling off businesses, splitting up the company, says Shawn Campbell, of Campbell Asset Management, who has followed Motorola for years. They're running out of things to sell.

Icahn's Pressure on Motorola

Billionaire investor Carl Icahn, who has been agitating for a breakup to boost Motorola's flagging stock price, has offered the loudest skepticism over the company's tumbling value. Icahn has been steadily increasing his Motorola position, disclosing in a filing this month that he now owns 142.4 million shares of the company, or 6.3 percent, up from five percent a month ago.

Icahn questioned Brown's 2009 timeline in a letter released on Wednesday, asking: Do you intend to carry out your proposals, or will it be a repeat of last year's proxy fight strewn with a string of broken commitments?

The announcement came two days after Icahn sued Motorola, demanding internal board documents about its executives and its cell phone business which he believes would show that the company was lax in its management. Icahn is now leading a proxy fight for four Motorola board seats ahead of the company's annual meeting in May.

Cell phone production is the largest division of the company, bringing in $18.99 billion in net sales last year, a 33 percent decline from a year earlier. In 2007, the division lost a total $1.2 billion.

All eyes will be on Motorola next week as the top handset makers and wireless companies will gather in Las Vegas for the mobile industry's largest American trade show, CTIA Wireless 2008. Nokia, Apple, and Samsung among other top mobile makers, will take the opportunity to unveil flashy new handsets that consumers will be snatching up over the next year.

However, when it comes to Motorola, expectations are low.