First of all, I believe this was first about Motorola’s patent portfolio in Google’s attempt to protect Android from the intellectual property lawsuits that are flying around. For all of the company’s recent saber rattling about a consortium of companies (which included Microsoft and Apple) which bid on and won Nortel’s patent portfolio (and how that action amounted to anti-competitiveness behavior), the fact that the deal has a $2.5 billion breakup fee (which is a fairly hefty sum) says that Google was not operating from a position of strength and that Motorola Mobility had the upper hand in getting what they wanted. After losing the Nortel bidding war, Google found itself further in the patent hole and had few options except to go for MMI. For $12.5 billion (or $9.5 billion is you exclude MMI’s $3 billion in cash), Google also inherits a 19,000 head workforce (which will increase their total headcount by 60%), manufacturing facilities located all over the world, other hardware product lines (cable set top boxes, cable modems) and an overall low margin and money losing business. Motorola’s industrial design is nothing to write home about either. Furthermore, aside from MMI being an Android licensee, there seems to be a lack of synergy between the two firms businesses. Google has primarily been a software engineering company with high operating margins. Google also has little in the way of experience with customer service and support which comes with the territory with hardware. And what about actually integrating two very disparate corporate cultures? Having been through consolidations (of much smaller size) and the resulting reorganizations which follow, it was never quick and easy. And often times what happens, key personnel leave (especially like in this case where there is a significant premium regarding MMI’s share price) either prior to or after the actual acquisition (some leave after, once the organization changes and/or corporate culture is no longer to their liking). As a result, Motorola Mobility could lose key engineering talent unless of course Google compensates them appropriately (which of course, affects Google’s bottomline). Then who exactly is going to oversee the subsidiary while also reporting to Google corporate? You need someone who can work easily across two disparate businesses and work cultures.
So at $12.5 billion, where exactly is the shareholder value? Google had a net profit of $8.5 billion in 2010 and $6.5 billion in 2009. That $12.5 billion represents at least 1.5 years worth of profits. Unlike Apple where it rakes in the highest amount of profits in the mobile space per handset, Google gives away Android and makes the bulk of their money from advertising revenue. We are talking two completely separate business models at play. Google is going to have to sell a buttload more of ads (and I personally feel all of this online advertisement and the revenue it generates is a huge stack of cards which could come falling down since a lot of it is a rigged scheme). The acquisition of Motorola Mobility does little to change that from a margin perspective when it comes to their hardware. And while Google’s Android partners released nearly same sound PR statements supporting the deal (in terms of it protecting the Android platform), one has to wonder exactly how hardware manufacturers really feel behind closed doors now that Google is going to have a wholly owned subsidiary competing against them. Rhetorical question; just how much of a level playing field will exist? One of the expectations being played up is Google offering a more integrated approach like Apple (which is one of the key reasons why the whole iOS platform and ecosystem is successful as they control the entire experience). If Google doesn’t give favorable treatment to MMI, exactly where is the shareholder value regarding the hardware? And even if Google manages to quickly spin off the manufacturing parts of the business, I highly doubt they will get a good price for it (which would reveal, they overspent just for the patents), which again, leads the question as to shareholder value with the money they are spending?
As noted in previous postings, I have a defective crystal ball. However, patent portfolio aside (and that one too may not be all that it is cracked up to be if some of these are FRAND [fair, reasonable and non-discriminatory] encumbered patents), I personally have low confidence in this merger (if approved) as it is getting away from Google’s core competencies (services including online mail, search, ads, etc) and I highly doubt this will yield significant positive results for the company. The ones who will make out are Motorola Mobility employees who own company stock and/or have stock options which have vested. Due to the craptacular climate we’re heading towards, I plan to divest my remaining shares whenever the stock decides to rally back over $600 in the future as this one could be a far worse stinker than the Time Warner and AOL merger ever was. Furthermore, Google is burning bridges left and right. Burning the Apple bridge was probably former CEO Eric Schmidt’s dumbest move as there are more than enough signs that Apple is working on creating replacements for Google cloud services. Jobs’ even shot one across the bow when he noted that iCloud’s e-mail will be ad free. And while he has also stated they aren’t getting into the search business, that reminds me of those times in the past when he vehemently downplayed video on the iPod only to release the feature later once other parts of the ecosystem were in place. Apple’s new and huge data center for iCloud is just a start and it would not surprise me to see them eventually release their own advertisement free search engine as an alternative. Now that is something which would be truely entertaining to sit back and watch.
