NEW YORK (Bloomberg) - Motorola Inc. plans to split into two companies next year amid pressure from billionaire investor Carl Icahn to break off the money-losing mobile-phone business that it pioneered 25 years ago.

One company will focus on handsets and the other will sell network equipment, cable TV set-top boxes and two-way radios - businesses that are profitable and growing faster. The board is looking for a new CEO for the phone business, Motorola said today in a statement.

The decision buys time for CEO Greg Brown to revitalise the handset unit before the split. Icahn has said the division is undervalued and demanded that it be separated with new management. Before yesterday, Motorola stock had fallen 56 percent in the past two years as customers defected to phones from Apple Inc. and Nokia Oyj.

"If they had been forced to sell it off, shareholders would have been forced to accept a bargain basement price," said Richard Windsor, a Nomura International analyst in London who recommends holding on to the stock. The move is "the one that makes the most sense for shareholders."

Motorola, based in Schaumburg, Illinois, said it wants the split to be a tax-free way for investors to hold shares in two publicly traded companies. Mr. Icahn, who owns about six percent of Motorola's stock and is the No.2 shareholder, did not return a call seeking comment.

Motorola rose 20 cents, or 2.1 percent, to $9.96 at 1.32pm in New York Stock Exchange composite trading.

Motorola lost market share last year after failing to repeat the success of its Razr, which created the category of slim phones in 2004. The device, which initially sold for $500, lost its cachet and is now free with some calling plans. While all its main rivals boosted sales in the fourth quarter, Motorola's phone shipments plunged 38 percent.

The break-up will accelerate a recovery in the handset business and provide "clarity of direction" for customers and employees, Brown said on a conference call. The company said on January 31 that it would consider splitting off the unit.

Motorola's handset business will probably have a value of $1.69 a share next year, while the other divisions could be worth $7.49, Merrill Lynch analyst Tal Liani in New York said yesterday in a note to clients.

Mr. Brown would not comment on the potential market value of the phone unit.

"The Razr was so successful as a unique product that it masked a lot of the underlying problems," said Michael Walkley, an analyst at Piper Jaffray & Co. in Minneapolis. "Once Razr sales started to fade, their cost structure wasn't competitive, especially now that they don't have the right products for the market."

Mr. Brown declined to comment on the effect of the split on earnings or what will happen to the Motorola brand name.

"Each company would benefit from improved flexibility, a capital structure more tailored to its individual business needs and increased management focus," said Mr. Brown, who took over after Ed Zander stepped down at the start of the year.

Mr. Brown said that he and chief financial officer Paul Liska will stay with the network equipment business.

The handset business lost $388 million last quarter. The networks and set-top box unit had a profit of $192 million on 11 percent sales growth, while the unit making radios and scanners had a profit of $451 million and a 35 percent revenue increase.

Apple stepped up competition in handsets with the introduction of its Web-browsing iPhone in June. The company sold 2.3 million of the devices in the holiday quarter. Motorola's Razr sequel sold 1.5 million units in that period.

"Software is becoming more important in the mobile-device business," Mr. Brown said in an interview, referring to applications such as Web browsing, mapping and music. "We have traditionally been strong in design as a corporation and quite innovative. I think that innovation needs to extend itself into broader experiences and consumer applications."

Motorola, founded in 1928 in Chicago as Galvin Manufacturing Corp., introduced its first car radio in 1930. The Motorola name came from the combination "motor", as in motorcar, and "ola." The company adopted that name in 1947.

Motorola started selling the world's first commercial mobile phone, the DynaTac, in 1984. The phone acquired further cachet in 1987, when fictional financier Gordon Gekko, played by Michael Douglas, used it to make deals in the movie "Wall Street."