Drunken Marriage Ends in Quick Divorce; Peeks into Google’s plan for the future

Google sells Motorola Mobility to Lenovo for $2.91 billion

After a brief foray into manufacturing smartphone devices, Google Inc. (NASDAQ:GOOG) announced on 29 January 2014 that it is selling its Motorola Mobility division to China’s Lenovo for $2.91 billion. This will in turn enable Google to focus on its Android mobile operating system software and the new wave of smart devices. The total amount consists of $660 million in cash, $750 million of Lenovo shares, and a $1.5 billion promissory note.

Google said it will maintain ownership of “the vast majority” of the Motorola Mobility patent portfolio, to which Lenovo will receive a license. The company valued those patents at $5.5 billion, according to a regulatory filing last year. Lenovo will also receive more than 2,000 patent assets. Moreover, Lenovo will take ownership of the “future Motorola product roadmap,” as well as the Motorola Mobility brand and trademark.

CEO Larry Page said that Google wants to focus on Android-based devices and believes that Motorola will be “better served” by Lenovo in the “super competitive” smartphone market. Google will continue its investments in other hardware such as wearables and smart home devices. Lenovo chief Yang Yuanqing said the deal “will immediately make Lenovo a strong global competitor in smartphones.”

Did Google Take a $9.5-billion Hit?

Source WSA
Source WSA

Speculation is abuzz how Google lost billions of dollars in selling the Motorola business to Lenovo for $2.91 billion. After all, the technology giant paid $12.5 billion for Motorola, simple mathematics would reveal that it took a massive hit of $9.59 billion, or does it?

Delving deeper into details reveals that Google didn’t exactly lose nearly $10 billion in the deal. Consider the following aspects:

    • When Google bought Motorola, the hardware maker had about $3 billion in cash and around $1 billion in tax credits. This effectively brings down the original deal price to about $8.5 billion.
    • Google sold Motorola’s set-top box business to Arris (NASDAQ:ARRS) in December 2012 for $2.2 billion cash and 10.6 million Arris shares (which is worth $.27 billion with each share priced at $25.86 at yesterday price). The value of the deal comes at around $2.5 billion. This effectively reduces the price to $6 billion.
    • Google has now sold the Motorola Mobility handset business, alongside few patents, for $2.9 billion. The price now comes down to about $3.1 billion

Moreover, it has drawn revenue from Motorola’s patents since the transaction closed, further reducing the deal’s cost. These calculations also ignore the strategic benefits Google has enjoyed from the deal. It locked up important patents to defend its Android ecosystem, while climbing into a position to pick the right strategic partners for the Motorola hardware businesses. Overall, Google did not do so bad after all in terms of losing money in the deal.

What Does Google Gain

Motorola was always an odd acquisition for Google, putting it into an awkward position of owning a company that competed with all the other makers of its operating system. While Google maintained that Motorola was just another partner, like all its other Android partners, it was a hard case to make given that Google brought in Dennis Woodside, Vice President of Google, as the CEO of Motorola.

When Google acquired Motorola, it explicitly stated that Motorola’s patents were to be used to protect Android handset makers from litigation by Apple and Microsoft. Google also used the acquisition to counter the growing influence of Samsung, which sells a majority of the Android-based smartphones.

Motorola now makes one of the best, if not the best mid-range Android smartphones, the Moto X, along with its equally well-reviewed cousin the Moto G. Motorola’s losses are likely to dampen Google’s earnings at least for the first half of this year. That’s because it’s expected to take 6-9 months before the proposed sale gets the necessary approvals from regulators.

It might seem like Google is taking a $10-billion hit on the sale of Motorola to Lenovo. However, Motorola has already helped Google save billions of dollars in taxes. Another way to look at it would be that Google has been able to create a competitor to Samsung, which is headed by an ex-Google employee (as of now).

What Does Lenovo Gain

With this deal, Lenovo gets to foray into the over-saturated US Smartphone market. Instead of spending billions building its smartphone brand, relationships with carriers, and building key manufacturing relationships from scratch, Lenovo will now use Motorola’s branding, relations, and infrastructure in the US as it now has the rights for ‘Motorola Mobility’.

Moreover, buying Motorola will enable Lenovo to join Apple Inc. as the only major technology company with global product lines in PCs, smartphones and tablets, putting Lenovo in a better position to become a one-stop shop for companies to buy all their devices from the same vendor.

Win-Win for All

The Motorola buy provides Lenovo a firm foothold in the Smartphone and Tablet markets where it is eager to gain traction. It also acts as a peace offering from Google to Samsung and other partners that make devices powered by Google-backed Android software.

It gives Lenovo, the world’s biggest PC maker with a 16.7% market share in Q2 2013 as per IDC, a firm foothold in the Smartphone market and puts it in prime position to challenge Apple and Samsung across all areas from computers and tablets to mobiles. On the other hand, Motorola will gain access to an ambitious owner that has a strong presence in the Chinese market.

Source IC insights / WSA
Source IC insights / WSA

Lenovo has been vocal about its intention to move into the US Smartphone market this year. However, it has not been able to make much headway until now. Lenovo made a bid for BlackBerry in late 2013, which was ultimately blocked by the Canadian government. Motorola actually marks Lenovo’s second acquisition announcement this month: just last week, Lenovo said that it had reached a deal to buy IBM’s x86 server business.

Rise of the Chinese

While the deal is subject to approval by both US and Chinese authorities, Chinese companies faced the most scrutiny over their US acquisitions in 2012, according to a report issued in December by the Committee on Foreign Investment in the US. Analysts say political issues could cloud the Motorola sale, especially with Lenovo trying to seal the IBM deal at the same time.

In the last two years, China’s three biggest handset makers, Lenovo, Huawei, and ZTE Corp., have made their presence felt in the Global Smartphone market, helped partly by their huge domestic market sales.

Although Huawei and ZTE were able to make some inroads into the US market, the Chinese companies continued to grapple with issues like low brand awareness, perceptions of inferior quality, and security concerns. On the other hand, Lenevo has not made its foray into US market until now.

Most marriages aren’t all that successful when the spouses are separated. Motorola continued to lose money and Google’s vision of hardware has shifted. Smartphones, as they are today, are officially a commodity. Moreover, Samsung and Apple control the market, and the others pick up the scraps. At this point in the game, no one is going to be able to grab market share from Samsung or Apple, unless either or both companies make a serious mistake in their growth strategies. That may or may not happen anytime soon.

Google’s vision is the next big things in hardware like wearables, home automation, robots, and whatever else they can conjure. Motorola just didn’t fit into this category. Although Google has retained Motorola’s Advanced Technology Group, the team that has been working on modular smartphones called Project Ara, among other things. The Advanced Technology Group makes a great fit with Google’s forward thinking. If we include the recent $3.2-billion Nest purchase, it becomes clear that Google is committed to investing heavily in the next generation hardware and has bought for the product team that will hopefully help cultivate unique products.

All said and done, Google and Motorola had the right intentions with their marriage, but has no future. Instead of trying to work out grudgingly, Google decided to keep the “stuff” that it felt was the most valuable and let the rest go. We believe that the marriage did not end by the influence of any third party, but because there was no future to it. It looked promising in the start, but was never a match made in heaven. In the end, Google did what was best for its future. Google however made sure that it kept the Ferrari and the Speedboat.

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