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Google’s calculated gamble?
The acquisition of Motorola Mobility presents the strongest means at Google’s disposal to challenge Apple’s dominance. Whether Google can pull that off remains to be seen
Issue Date - 15/09/2011
As the boards of directors of Google and Motorola Mobility approved the $12.5 billion (or $40 per share) buyout of the latter by the former on August 15, 2011, the $3.1 billion purchase of online advertising firm DoubleClick, Google’s largest acquisition so far, was a thing of the past. And so was Google’s status as just a notable search engine giant. It was now a hardware manufacturer too, challenging its arch rival Apple more directly than its Android licensing programme allowed it to, especially in terms of a more tightly integrated multi-screen proposition.

Interestingly, Google also offered Motorola Mobility a significant reverse termination fee – a whopping $2.5 billion – to guarantee that it will remain committed to the deal. That’s around 20% of the total purchase price. Remove Motorola’s $3 billion in cash on hand from the purchase price, and the fee forms an eye-popping 26% of Google’s total consideration, way above the normal reverse termination fees, which usually run 4-10% of any given transaction. Further, Google is paying 63.5% more than Motorola Mobility’s closing price on the New York Stock Exchange on August 12, 2011. Considering that the average premium of more than 360 deals in the wireless-equipment industry on that basis was 32% in the past five years (Bloomberg data), it’s certainly big money that Google is paying for a company that has been struggling to remain profitable in recent months.

For information, Motorola Mobilty posted net losses of $81 million & $56 million in the first and second quarter of 2011. Moreover, while the global handset market has been growing at a smart pace (global mobile phone shipments rose 13% y-o-y in Q2 2011), Motorola has failed to keep up with the competition. In fact, in Q2, Motorola shipped just 10.6 million handsets (out of which 4.4 million were smartphones), as compared to its peak of 65 million handsets in Q4 2006.

The reason is clear. Google did not join hands with Motorola for its global handset reach or even brand equity for that matter as its current market share is less than 2.5%. The main reason for this historic deal is the recent legal context surrounding smartphone IP. In fact, Google’s deal for Motorola comes a month after it lost a bid to a consortium (which included Apple, Microsoft, RIM, Ericsson & Sony) for 6,000 patents from the Canadian Nortel. For Google, which faces an increasing number of patent infringement claims against its Android system, the loss was a major blow. Thus, the deal, which requires regulatory approval and is expected to close by the end of 2011 or early 2012, would give Google a quiver with more than 17,000 patents (with an additional 7,500 pending) that would help it defend Android OS from a barrage of patent lawsuits from its rivals. Besides this, Motorola Mobility is a leading maker of TV set-top boxes and the acquisition could stage a comeback for the troubled Google TV. Further, owning a handset manufacturer allows Google to better integrate software and hardware. No doubt, with the Motorola buyout, Google is trying to take a leaf out of Apple’s book by becoming more vertically integrated. But the question is, can it succeed?

This is a difficult call as several arguments weigh against Google’s decision, the most important being its lack of experience as a hardware manufacturer and vendor. Worrying still, Page’s experience as a CEO in the current stint is less than six months. But, there’s a catch too. When Google purchased Android Inc. in 2005, it was suspected that Google intended to enter the mobile market soon enough. Apple and Google, erstwhile confidantes, became open competitors post the Android purchase. Now, with the acquisition of Motorola Mobility, Google will move from the position of partner to that of competitor to 39 phone makers that use different versions of Android across their platforms, potentially placing significant strain on the Android ecosystem. The increase in the intensity of rivalry could well be something that Google may not have forecasted, as other mobile makers may suspect Google’s future intentions in promoting Android.

Google cannot ignore the fact that more than 95% of the Android shipments today are coming from non-Motorola handset vendors. For starters, Android OS, which has helped many handset and tablet makers live to see the present (like HTC, Dell and Motorola itself), has earned global fame (67.23 million handsets sold in 2010, as per Gartner, accounting for a 22.7% market share) in just 3-4 years time. In fact, as per Gartner estimates, the platform will become the #1 mobile OS by the time this very year ends, with a 38.7% market share.

S&P has already downgraded the Google stock and made a sell recommendation. In the previous 52 week period, Google’s stock has yo-yo’d between $448.00 and $642.96, currently being at the $540 range – proving how mercurially vicious has been investors’ response to Google’s strategic manoeuvres.

Says Nick Dillon, the London based Principal Analyst at Ovum Research as he tells B&E, “If, for instance, Google provides preferential access to the Android code to its own hardware division, this would place other vendors at a disadvantage and may lead them to question their commitment to the platform, potentially pushing some towards other platforms.” And if this happens, the one beneficiary of any move away from Android would be Microsoft and its Windows Phone platform, as many larger Android users such as Samsung, LG, HTC and ZTE are also Windows Phone licensees.

Thus, if Google wants to ensure that everyone benefits from the deal and its ongoing engagements with other bigger players are not endangered, it needs to keep its OS business separate from the handset business. Reason: It’s still far from clear that Google can successfully transform itself into a device maker.

Deepti Singh           

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