Google buying Motorola mobility- Smart deal but is it a smart strategy?

The big deal Monday morning was Google’s jumbo sized deal to buy out Motorola Mobility(MMI) for $12.5 Bil in cash. Clearly this one is Google’s largest deal ever- 4x their previous one with DoubleClick and >8x of Youtube. At first glance, it appears that Google has overpaid( a 63% premium for Friday Aug 12th closing price) for MMI, or did they?

 

Firstly MMI balance sheet shows about $3 Bil in cash – so let’s back that out- we are down to $9.5 Bil. Then there is the value of their patents. Carl Icahn who owns a significant stake in MMI has pointed out earlier that MMI’s patent portfolio is significantly larger than that of Nortel’s. Larger at 17000 patents or so -yes, but is it valued more?

 

As we know Nortel’s portfolio was acquired recently by a consortium led by Apple and others for $4.5 Bil. So let’s assume for argument’s sake that MMI patents are worth about $5.5 Bil. Then we are down to $4.0 Bil. MMI’s business includes a set-top box business (revenues of $907 Mil in the last quarter with a Y-O-Y growth of 2%). What if Google’s plans include selling that business for at least $1.5 Bil.  Then what Google paid out reduces to $2.5 Bil. Now by this logic,the acquisition does not appear that big. So financially it may make some sense but what about strategically?

 

Given all the recent patent lawsuits that companies in the mobile space are lobbying at one another, this could beef up Google’s patent portfolio.  But will it?- Both Apple and Microsoft are currently involved in patent litigation with MMI and vice versa. Given that Motorola would have used it’s best defenses, in some respect’s it’s patent hand has already been shown-i.e it did not deter MSFT and AAPL from suing MMI-  see Florian Mueller’s Foss Patents blog – it has some very good data points to throw more light on these MMI patents.

 

Then there is the awkward competition this deal will introduce with existing Android handset makers like Samsung, HTC and LG. Even though Google is saying that it is business as usual for now, the next 12 months will look quite different when they start competing with these entities. It all boils down to Google executing a successful strategy of hardware and software integration.

 

This deal is really about taking a big leaf out of the Apple playbook and trying out that integrated Android platform strategy. ‘Integration’ moves in this direction are not new, but none has made much of an impact overall mobile marketplace – For example

 

a) MMI and Google worked together several times and have launched many Android phones already- the Droid being the most talked about.

b) Microsoft and Nokia are also teaming up in this area- It would not surprise if Nokia’s handset business got acquired by Microsoft eventually but that’s another story.

d) HP took Palm off the table and is also launching integrated phones/ touch pad’s using the PalmOS.

e) RIM already has the most integrated platform out there but that did not prevent loss of market share to Apple.

 

Hence these deals may really do little to change anything- the real strategy that is hard to decode  is that which is embedded in Apple’s design, supplier management, pricing and marketing- the whole integration!. Which in itself is a moving target.

 

Perhaps Google is looking to make a better deal by leveraging it’s search and advertising power somewhere inside Motorola’s Patents, set-top boxes and phones- now that would be interesting revenue multiple to their already strong search business!