Why the Google-Motorola Deal Could be a Devil in Disguise
Google (NYSE:GOOG) last week surprised the market with its Motorola Mobility (NYSE:MMI) acquisition announcement for $12.5 billion. While Google will surely benefit from Motorola’s 17,000+ patent portfolio, the deal (which is the biggest ever for Google) raises some serious concerns on how Android’s other customers such as Samsung and HTC will fare. The acquisition is also risky given that Google has no prior experience in the low-margin hardware business and whether or not it can successfully imitate its biggest competitor Apple (NASDAQ:AAPL) in integrating hardware and software platform. While some analysts suggest that Google has no interest in the hardware portfolio, we have seen no signs from the company that this is the case.
We currently have a price estimate near $600 for Google’s stock, which is roughly 12% above the current market price.
Google Has Its Own Patent “Moat” Now
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As discussed in our recent note, the primary gain for Google is access to Motorola’s 17,000+ patent portfolio. Until recently, Android and its handset makers have borne the brunt of expensive patent litigation and license fees, threatening their profit margins. With the acquisition of Motorola Mobility and all its proprietary patents, this threat would be considerably reduced, as competitors are deterred to file patent infringement lawsuits. This acquisition more than makes up for Google’s patent fiasco with Nortel.
But Motorola is a Clear Threat to Other Android Phones
Despite the reassurances given by Google, the Motorola deal is bound to create some clear conflicts of interest among Android handset makers such as Samsung and HTC. Motorola constitutes about 28% of all Android phones as of Q2 2011 (see figure below), and the remaining 72% can’t feel any happier knowing that their OS partner Google would be directly competing against them for hardware sales.
Samsung and HTC might not have a choice but to stick with Google’s Android for the time being, but with Microsoft’s (NASDAQ:MSFT) Windows 8 OS scheduled to launch in 2012, we might see Android-based handset manufacturers walking away from Google if Motorola is given preferential treatment.
Source: Nielsen/Business Insider
Can Google Pull an Apple?
One of the reasons for Apple’s soaring profit margins (relative to competitors) is the seamless integration it has between its software and hardware like the nice ecosystem created among products like the iPhone, iOS, iTunes and Mac. With Motorola Mobility, Google seems to have launched its own bid to achieve this goal. But the odds are heavily stacked against Google.
Since its inception, a bulk of Google’s revenues are still coming from its search and display ads business, and the company has no real prior experience in managing a low-margin, manufacturing-based hardware business. Google needs to climb a mighty fast learning curve to successfully combine Motorola’s manufacturing prowess with its own software experience.
The Deal Is a Mammoth Transition for Google
Besides the external impact, Google has to brace itself for integrating Motorola Mobility into its own organization. Google boasts of a drastically different organizational culture. Additionally, Motorola has over 19,000 employees – a whopping 60% of Google’s employee strength of around 29,000. These factors together would make it a significant challenge for Google to successfully merge manpower in these two companies.