Monday, August 15, 2011

Google Buys Motorola Mobility for $ 12.5 Billion

It looks like Google (GOOG) will acquire Motorola Mobility (MMI) for $ 12.5 billion in cash or what is a 63% premium to Friday's closing price.

Press Release: Google to Acquire Motorola Mobility

Here's what CEO Larry Page had to say in this blog post:

In 2008, Motorola bet big on Android as the sole operating system across all of its smartphone devices. It was a smart bet and we're thrilled at the success they've achieved so far. We believe that their mobile business is on an upward trajectory and poised for explosive growth.

Motorola is also a market leader in the home devices and video solutions business. With the transition to Internet Protocol, we are excited to work together with Motorola and the industry to support our partners and cooperate with them to accelerate innovation in this space.

Motorola's total commitment to Android in mobile devices is one of many reasons that there is a natural fit between our two companies. Together, we will create amazing user experiences that supercharge the entire Android ecosystem for the benefit of consumers, partners and developers everywhere.

The patent battles between the largest players have been heating up. In the post, Larry Page said that Motorola Mobility strengthens Google's patent portfolio. According to Motorola, the company has 24,000+ patents and pending patent applications.

It's tough to gauge how valuable these patents will end up being for Google. Yet, it seems clear from recent comments and Google's attempt to shore up the patent portfolio via this acquisition that the company feels there's real threats from some of these ongoing patent battles. More from Page's blog post:

Our acquisition of Motorola will increase competition by strengthening Google's patent portfolio, which will enable us to better protect Android from anti-competitive threats from Microsoft, Apple and other companies.

For background, here's a relevant earlier post from the Official Google Blog: When Patents Attack Android

Patents are certainly not the greatest source of an economic moat (I'll take a good brand with wide distribution over just about any patent) but if you are in Google's position shoring up the intellectual property portfolio makes sense.

Here's some perspective on the size of Motorola's patent portfolio. From the Atlantic Wire:

Last month, a consortium of companies including Apple, Microsoft and Research in Motion beat Google in an auction and purchased Nortel's portfolio of 6,000 patents for $4.5 million. With 24,000 patents, Motorola Mobility's portfolio dwarfs that of Nortel's, and the $12.5 billion all cash price tag makes it seem like Google got a deal by comparison.

Of course, all patents are not created equal so there's no obvious answer to the question of which portfolio is actually of higher value.

Maybe the deal ends up being, at least in part, a chance to better integrate hardware and software product development in the way that Apple does but I'm guessing it's more about the patents.

On a price to earnings basis, the deal looks very expensive at nearly 30x forward estimated earnings (there's is a wide range of estimates so that multiple could easily be much lower or higher). Motorola Mobility does have over $ 3 billion in net cash so the price tag is actually more like $ 9.5 billion after adjusting for cash. No matter what, under most circumstances this certainly would have to be considered a pricey deal.

By itself, Motorola Mobility is not in a great business. It's in combination with Google's strengths that, at least in terms of defense, the assets of Motorola Mobility start to look valuable.

Whether this a good thing for Google's shareholders is tough to know because it seems, for the most part, to be a relatively expensive but important safeguard. I'm guessing the move is mostly about keeping Google's mobile strategy from being derailed not the value of Motorola Mobility's mediocre at best business.

So it's possible that the price paid may end up being more than justified considering what's at stake. Google seems to think it needs to fortify and enhance its advantages against what are extremely well-financed competitors like Microsoft (MSFT) and Apple (AAPL).

Combined, Microsoft and Apple are sitting on over $ 100 billion in net cash and have ~$ 45-50 billion in annualized free cash flow.

No matter what Motorola shareholders certainly are winners.

Google says they are committed to Android as an open platform and remains committed to the other device makers.

One of the questions is how will the other Android device makers respond. It looks like at least some of them view it favorably as the CEOs of HTC, Sony Ericsson, and LG have all already made public statements in support of this move by Google.

To date, 150 million Android devices have been activated worldwide with an additional 550,000 of the devices activated each day.

 Adam

Long positions in GOOG, MSFT, and AAPL

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