Google Inc. agreed to acquire Motorola Mobility Holdings Inc. for about $12.5 billion in cash, giving the developer of the Android mobile operating system its own handset maker and some key patent protection.
The deal would help Google compete more directly with Apple Inc., while stepping up the pressure on Research in Motion Ltd. and Nokia Corp. Google also gets access to Motorola's patent trove at a time of increasing demand for intellectual property involving mobile devices.
Meanwhile, the acquisition makes rivals out of some Google partners that license its Android operating system, raising questions about the way Google will operate that business.
Motorola Mobility shares soared 59% to $38.80 premarket, approaching the offer price of $40 a share, which is a 63% premium to its Friday close. Google shares were down 2.8% to $547.80.
Google expects to complete the transaction by early 2012, and it has been approved by the boards of both companies. The deal has a reverse breakup fee of $2.5 billion in cash, according to a person familiar with the matter. The hefty amount may indicate some nervousness about the deal's regulatory prospects as Google has raised antitrust concerns with the Department of Justice.
Google, which owns the fast-growing Android operating system used in millions of mobile phones, has a thin portfolio of wireless and telecommunications patents.
It recently lost the bidding for Nortel Networks Corp.'s patent trove to a consortium of tech heavyweights such as Apple Inc. and Microsoft Corp. Meanwhile, Google and Microsoft have engaged in a war of words over their recent maneuvers in intellectual property auctions, underlining the heated tone of the market for such assets.
Evercore Partners analyst Alkesh Shah said.
"The big thing it plugs for Google is: Google's patent portfolio is only a few thousand, and they have been the target of a significant amount of patent litigation. Motorola's patent portfolio provides a very strong defense against all this litigation."
Google will run Motorola Mobility as a separate business that will remain a licensee of Android. It was not clear how the deal will affect Google's relationship with other Android partners, specifically HTC Corp., LG Electronics Inc. and Samsung Electronics Co. In its press release, Google said things wouldn't be different.
Andy Rubin, Google's senior vice president of mobile at Google said.
"Our vision for Android is unchanged, and Google remains firmly committed to Android as an open platform and a vibrant open source community. We will continue to work with all of our valued Android partners to develop and distribute innovative Android-powered devices."
Others, though were more skeptical. Morgan Keegan analyst Tavis McCourt said on CNBC.
"I think this is their early attempt to replicate Apple's business model."
Increased sales of devices running the free Android software have given Taiwan's HTC and South Korea's Samsung a shot in the arm after losing market share to Apple's iPhone handset. All three manufacturers, including LG, have said this year they will be boosting the output of Android-based devices.
Samsung and LG declined to provide an immediate comment; HTC said it will make a statement shortly.
Meanwhile, Google had preliminary acquisition discussions with wireless technology developer and licenser InterDigital Inc. after missing out on Nortel. InterDigital shares slid 23% to $58.60 in premarket trading.
Most of the Motorola's revenue comes from smartphones, and the company has been working to diversify its customer base to defend against the potential loss of Deutsche Telekom AG's T-Mobile USA, a key customer.
Activist investor Carl Icahn, who is the company's largest shareholder, had been pushing for Motorola to sell its patents, a move he has argued could raise billions of dollars.
In a statement Monday, Mr. Icahn said,
"This is a great outcome for ALL shareholders of Motorola Mobility, especially in light of today's markets. In the past three years we have fought long and hard to separate Motorola Mobility from Motorola Solutions, as well as bring Sanjay Jha, as co-CEO."
Some analysts had said the deal could hobble Motorola, which relies on intellectual property to compete.
The smartphone and set-top-box company split with Motorola Solutions Inc., which is focused on business and networking operations, at the beginning of the year. The separation made Motorola Mobility nimbler and more focused on its core operations, but it faces a highly competitive smartphone market, including a persistent threat from Apple's iPhone.
Last month, Motorola reported a 28% rise in second-quarter revenue, thanks to strong tablet sales, but the device maker provided weak guidance for the current quarter because of delays in launching speedier 4G devices.
Meanwhile, Google's second-quarter earnings rose 36% on record revenue as the Internet giant experienced strength in its core search business and gained traction with its newer operations.
COMMENTARY: I have to admit that Google's acquisition of Motorola Mobility is a total surprise. This leads me to ask a number of questions or raise some important issues:
- Why would Google acquire Motorola Mobility, when that company is losing market share (see below chart) to both Samsung and HTC, and its Xoom tablet is not doing very well either? Motorola Mobility only sold 4.4 million smartphones during Q2 2011, or 4.08% of the total smartphones sold, and only represents 9.4% of the total Android market. Motorola Mobility has sold only about 100,000 Xoom tablets to date. Google paid nearly 2.42 times Motorola Mobility's book value per share after eliminating the $3 billion in cash on Motorola Mobility's balance sheet This acquisition does not exactly light my fire. or even make sense from a strictly financial standpoint.
- Why would Google jeopardize its relationships with its Android ecosystem of mobile phone makers HTC and Samsung, by competing directly against them in the smartphone hardware business?
- Are Motorola Mobility's patents worth paying such a high multiple on the basis of book value per share? Motorola Mobility's patents only have a book value of $177 million on the balance sheet. Is there that much underlying hidden value in those patents? Does acquiring Motorola Mobility's patents provide some form of protection against the Oracle patent infringement lawsuit and Linux General Public License violation claim? Google says YES, but in what way will those patents protect its Android partners?
- How much value does Motorola Mobility's research and development bring to Google? A case can be made that Motorola Mobility now provides Google its own mobile R&D team that Google can utilize to develop future generations of mobile products.
- Could the Motorola Mobility acquisition signal a gradual phase-out of the Android OS and emergence of Chromium OS for mobile given its ongoing lawsuit with Oracle over JAVA and potential problems with Linux General Public License violation claim?
- Could the Motorola Mobility acquisition signal a closing of Android OS similar to Apple's OS5? In a blog post dated March 31, 2011, I commented on a Fast Company article in which it heard that Google was planning on closing Android to provide more synergy between mobile devices among its partners.
As I comment on Google's acquisition of Motorola Mobility, I can't help noticing that Google's stock price dropped by -6.54 points since the Monday opening. Motorola Mobility's stock ended +13.65 points. The Google stock price drop is not major, but a net of those who liked versus those who did not like the acquisition. This certainly did not create additional shareholder value based on its stock price.
Several analysts felt the Motorola Mobility acquisition would hurt relations with its Android phone partners, but the news of the Motorola Mobility acquisition was surprisingly viewed as overwhelmingly positive by Google's Android phone partners:
HTC Corp. said Google's acquisition of Motorola Mobility Holdings Inc. (MMI) will be
"Positive for the Android ecosystem and the smartphone maker is supportive of the deal".
Bert Nordberg, President & CEO, Sony Ericsson:
"I welcome Google's commitment to defending Android and its partners."
Jong-Seok Park, President & CEO, LG:
"We welcome Google's commitment to defending Android and its partners."
J.K. Shin, President, Samsung, Mobile Communications Division:
"We welcome today's news, which demonstrates Google's deep commitment to defending Android, its partners, and the ecosystem."
It will also be interesting to see how cell phone carriers will react. Google's Android platform is available across a wide variety of carriers (AT&T, Verizon and Sprint). Apple was able to have a large amount of control in the iPhone because they owned the hardware. The company was able to require certain characteristics of cell networks before allowing other carriers to carry the iPhone line. Google could now wield some power that they once did not have.
In spite of the skepticism, Google executives are very upbeat about the Motorola Mobility acquisition.
Larry Page, CEO of Google, said,
"Motorola Mobility's total commitment to Android has created a natural fit for our two companies. Together, we will create amazing user experiences that supercharge the entire Android ecosystem for the benefit of consumers, partners and developers. I look forward to welcoming Motorolans to our family of Googlers."
Sanjay Jha, CEO of Motorola Mobility, said,
"This transaction offers significant value for Motorola Mobility's stockholders and provides compelling new opportunities for our employees, customers, and partners around the world. We have shared a productive partnership with Google to advance the Android platform, and now through this combination we will be able to do even more to innovate and deliver outstanding mobility solutions across our mobile devices and home businesses."
Andy Rubin, Senior Vice President of Mobile at Google, said,
"We expect that this combination will enable us to break new ground for the Android ecosystem. However, our vision for Android is unchanged and Google remains firmly committed to Android as an open platform and a vibrant open source community. We will continue to work with all of our valued Android partners to develop and distribute innovative Android-powered devices."
In the midst of the Motorola Mobility acquisition, Google faces some dark clouds including a major software patent infringement lawsuit, an FTC investigation over its search business practices and a potential violation of the Linux General Public License.
- Oracle Patent Infringement Lawsuit - Oracle sued Google in August 2010, alleging that Android infringes on patents and copyrights associated with Oracle's Java software, which is also used in mobile devices. Oracle wants to know the full value of the Android ecosystem so it can ask a court for it in its suit over Java.
- FTC Anti-Trust Investigation - The FTC has expanded its investigation into Google's business practices to include its use of Android against competitors. Google has denied that it engages in unfair competitive practices.
- Linux General Public License Violation - Google's policies regarding Android may have put its licensees into violation with the General Public License, the license behind Linux. Android is a Linux. This may be the most serious threat according to Florian Mueller, who has been following the issue at his blog FossPatents, The loss of a distribution license to Linux can only be redeemed by getting new licenses from every kernel contributor, he writes, meaning there are now thousands of company that could legally shake down Android device makers, and app developers, for money.
Motorola Mobility's financial performance and smartphone market shares do not look particularly strong:
- Revenues remain relatively flat over the past three quarters.
- Earnings-per-share have declined over the last two quarters.
- Operating margins are in the red the last two quarters.
- Cash flows from operations have deterioated over the last four straight quarters.
- Motorola Mobility's home business is carrying the company.
- Motorola Mobility's share of the global mobile phone market was only 2.4% for Q2 2011, down from 2.5% in Q2 2010.
- Motorola Mobility's ranked No 6 with a 4.08% share of the global smartphone market with 4.4 million units sold during Q2 2011.
The only identificable positive I could find is that Motorola Mobility has $3 billion in cash and equivalents at the end of 2010.
Motorola is also the defendent in three separate patent infringement lawsuits filed by Microsoft, Nokia and Research in Motion over mobile phone technology. In June 2010, Motorola finally settled with Research in Motion. The mobile devices is rife with patent infringement lawsuits and counter-suits. There are so many of them that you cannot keep track of all of them. It's hillarious. The Guardian (UK) prepared the following graphic showing who is suing who in the mobile business.
Motorola Mobility has 15 different mobile phone models. That would average out to 293,000 per model based on the 4.4 million units sold in Q2 2011. Those numbers suck, don't you think. This is a situation very similar to RIM Blackberry. That's too damn many phones, increasing its manufacturing, inventory and warehousing costs.
In conclusion, the only positive besides the cash are Motorola Mobility's 17,000 patents. However, a lot will hinge on the quality of those patents. We keep hearing that the patents acquired provides protection for Google's Android ecosystem partners and that could make sense since there are several patent infringement lawsuits involving all of them (see below). According to several analysts, those patents could be used like currency to settle Google's patent infringement lawsuits with Oracle and Microsoft.
Motorola Mobility has sold between 100,000 to 125,000 Xoom tablet computers since its launch, and forecasts 500,000 for the year. I find that difficult to believe. This pales in comparison to the 23 million iPads Apple has sold through Q2 2011. Apple now commands a 94% market share of total worldwide tablets sold. Anybody that tells me that Google bought Xoom for its potential is smoking something. Xoom is just not ready for prime time.
It's also possible that Google could spinoff Motorola Mobility's home business segment, which generates about 30% of total revenues and is profitable. It could fetch at least $3-$4 billion depending on the patents.
The more I look at this acquisition, the more confused I become. But, it's fun speculating, isn't it?
Courtesy of an article dated August 15, 2011 appearing in The Wall Street Journal Technology and Google's Press Release dated August 15, 2011 and an article dated August 15, 2011 appearing in SeekingAlpha and an article dated August 12, 2011 appearing The Wall Street Journal Business
Comments