Motorola Mobility (NYSE:MMI) announced recently that almost 99% of the voting shareholders approved the company’s proposed $12.5 billion takeover by Google at a special investor meeting Thursday. The deal has already been approved by the company’s Board of Directors. Google (NASDAQ:GOOG) had offered to acquire Motorola Mobility in August this year for $40 per share in cash, which was a whopping 60% premium over the then market price. Google maintains that the primary reason for the deal is Motorola’s treasure trove of patents, which it hopes to use to defend itself and its partners that use the Android platform in their mobile devices against patent lawsuits from Apple’s (NASDAQ:AAPL) and Microsoft (NASDAQ:MSFT). The search giant says that it will not interfere in Motorola’s functioning and let the company function as a separate entity after the acquisition.
Our price estimate for Google is $628 , which is around 6% ahead of the market.
Google Could be Looking to Pull an Amazon with Phones
Motorola Mobility isn’t profitable at the moment but it has been paring losses sequentially this year. Its operating losses declined from $36 billion in the first quarter of this year to a mere $5 billion last quarter. However, Google’s motivation from this deal isn’t profiting from a turnaround in Motorola’s hardware division. Google’s core business is Internet search advertising, from which it makes the bulk of its money and wants to keep doing so. Having dominated the huge but increasingly staid desktop and laptop search market, Google has now shifted its gaze to the burgeoning mobile device market in which it sees immense potential for growth. Smartphones have become a rage across the world, including emerging markets and tablets are starting to see mass adoption.
By acquiring Motorola Mobility, it is possible that Google hopes to use not only its patents to protect Android from lawsuits that would impede its growth but also its hardware to provide a good enough phone at a much cheaper price, as the company looks to dominate the mobile search market. (see Are Cheap Google-Motorola Smartphones on the Way?) This motive is not very different from Amazon’s plans to further its content business by providing a cheap tablet, the Kindle Fire. Realizing that it is futile to try to compete with Apple in hardware design, Apple’s competitors are now trying to attract people with attractive pricing, in the process incurring a short-term loss on their hardware. As the smartphone and tablet market matures to include people who are far more price sensitive than the early-adopter crowd, this strategy may indeed reap dividends in the long run as they make their money back selling content, or, as in Google’s case, selling ads.
In any case, Motorola Mobility is a cash rich company and Google will also get its cash holding as a part of the deal. Considering that Google will be paying $12.5 billion for the company, and Motorola has about $3.3 billion in cash, Google will only be paying about $9 billion for the company’s underlying businesses, leaving behind another $30 billion after the transaction. Also, if Google does decide to sell smartphones at a loss, its huge operating margins are well-equipped to help the company tide over the short-term hardware losses.
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