Why Investor Concerns on the Googlorola Deal Falling Apart Are Premature

MMI: Motorola Mobility logo
Motorola Mobility

After trending higher for most of February as regulatory bodies in Europe and the U.S. signed off on its acquisition by Google (NASDAQ:GOOG), Motorola Mobility’s (NYSE:MMI) shares fell in the latter half of March and the trend continued in the first week of April. The reason? Investors have increasingly become concerned that China could be a big regulatory hurdle in Google’s attempt to buy out Motorola.

Motorola Mobility said in a filing last month that the deal was being held up by an extension of the second phase of review by China’s Anti-Monopoly Bureau of the Ministry of Commerce. [1] Google’s previous run-ins with China have also been rather unsavory with the company having to shut down its operations two years ago over the latter’s stringent censorship norms. This has further added to investor concerns that China may once again prove to be a significant roadblock by delaying or even refusing to give its clearance for the deal, forcing Google to abandon its $12.5 billion bid altogether.

See our complete analysis for Motorola MobilityGoogle here

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If these concerns gain more strength over the next few months, we see further declines in the stock price. If Google is forced to back out of the acquisition completely, Motorola might even slide back to the $20 levels where it was before Google announced its acquisition plans. We have a $21.61 fair price estimate for Motorola Mobility stock, at a discount of 90% than the current market price.

However, as of now, we don’t see such a scenario unfolding primarily for three reasons.

First, the current political landscape in China is very sensitive with the country looking at once-in-a-decade leadership change when the 18th National Congress of the Communist Party of China (CPC) convenes later this year. So this may not be an ideal time for an extreme announcement such as this.

Second, the actual concerns around the Google-Motorola deal are not of a monopolistic nature but more to do with how Google plans to use Motorola’s essential patents that fall under the FRAND purview.

Third, Google’s plans for Motorola are big, probably even bigger than just a patent defense. (see Are Cheap Google-Motorola Smartphones on the Way?) In a recent letter posted on the company website, Larry Page even left hints about a possible hardware play with Motorola. [2]  Google may therefore not be willing to abandon the deal so easily.

In all probability, China is only using this as a bargaining chip to get Google to accept some of its censorship terms. In order to get the deal approved, Google may have to agree to some of the terms but the dialogue does not necessarily have to be harmful for the company, as it could ensure its return to business in the world’s largest Internet market.

To conclude, it doesn’t look likely that the Google-Motorola merger would not be approved by China. It is more a question of when, rather than whether.

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  1. Motorola Mobility’s March 19th SEC filing, Edgar []
  2. 2012 Update From The CEO, Google IR site, April 5th, 2012 []