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Strategic rationale behind Google’s acquisition of Motorola mobility for $12.5 Bn and sale at $2.91 Bn

This article is written by Srishti Kaushal , a first-year student from Rajiv Gandhi National University of Law, Punjab, pursuing B.A. LLB. (Hons.). In this article, she discussed the reasons behind Google’s acquisition of Motorola Mobility and its sale to Lenovo at an apparent loss of $10 Billion.

Table of Contents

Introduction

The world was left in shock in 2011 when Google announced that it will be acquiring Motorola Mobility for $12.5 Billion. This was the largest acquisition by Google which completely baffled its shareholders. Further, in 2014 Motorola Mobility was sold to a Chinese technology firm, Lenovo at the price of $2.91 Billion. On the face of it, this seems to be one of the biggest losses that Google has ever incurred. However, in reality, this was a master-play in which Google emerged as a winner.

In this article, we will look into Google’s rationale behind this deal and whether this acquisition was actually a loss for Google.

But before moving forward, let’s understand what the companies Google Ltd. and Motorola Mobility are all about.

Google Ltd.

Google Ltd. is an American multinational company that specializes in Internet-related services. It is considered to be one of the biggest technology companies in the world. Though initially, it started as a core search engine, its massive growth triggered a number of partnerships and acquisitions, which continues to grow today.

Google is the proud owner of the Android mobile operating system (OS), which has been the best selling OS in smartphones since 2011. Along with this, Google also offers services like Google Maps, Google Calendar, Google Drive, etc, that come along with the Android software.

Motorola Mobility

Motorola Mobility is a consumer electronics and telecommunication company. It primarily produces smartphones and other mobile devices, which are based on Android operating software, which is developed by Google. It was formed after a split of Motorola into 2 segments, Motorola Solutions (focusing on companies enterprise-oriented business units) and Motorola Mobility.

Google and Motorola Business Deal

On 15th August 2011, Google announced, through a blog post on its site, that it acquired Motorola Mobility for $12.5 billion. It paid $40 per share for this. This amount was 63% more than the price at which Motorola Mobility closed on August 12. This deal was unanimously approved by the directors of both companies, but it still took a lot of regulatory efforts before Google was allowed to move ahead with the acquisition.

Google’s acquisition of Motorola resulted in a vertical merger. A vertical merger is a merger of 2 or more companies involved at different stages in the supply chain for a common good. In this case, the common good was the smartphone. While Google provided the software to go into the mobile phone, i.e., Android, Motorola Mobility provided the hardware, i.e, the mobile phone itself. Google announced that it would run Motorola Mobility as an independent company and finally received approval from the United States Department of Justice and the EU on 13th February 2012, and from the Chinese authorities on 22nd May 2012.

Why did Google acquire Motorola Mobility?

This deal is one of Google’s biggest buys. Let’s understand what were the possible reasons that encouraged Google to follow with this deal.

• Google is one of the greatest names in the software industry and with more than 80 years of service, Motorola Mobility is a great hardware company. Between 2010 and 2011, the smartphone industry observed an increase in the shipment from 4.1 million units to 5.1 million units. Because of this, Google saw a high potential in the smartphone market. The Motorola acquisition allowed Google to enter into the mobile-hardware manufacturing industry without having to work from scratch.
• Google realized that no Operating system is worth anything unless there is a handset. The Android Market was dominated by Samsung, which owned approximately 50% of the market share. Google realised the danger this posed. If Samsung decided to leave Android and develop its own OS (which it was trying to do) or partner with a different OS, Google would be left in a loss. Acquiring Motorola allowed it to increase its interference in the hardware manufacturing market and lessen Samsung’s threat.
• Motorola Mobility has been involved in the development of intellectual property and innovation in communication technology for a long time. In fact, it is responsible for the introduction of the world’s first portable cell phone. With this acquisition, Google acquired 24,500 patents at a rate much less than their actual price.
• Google has many creative ideas to modernize its software and thereby the smartphones. Ron, the former product head at Google had said that because of the unaccommodating hardware of the manufacturers, Google has not been able to implement its creative ideas like getting an instant signal when the phone owner walked into a restaurant and start streaming menus and reviews.

This acquisition allowed Google to implement its creative ideas as it got control over the hardware of Motorola and thus got an opportunity to integrate its software and hardware capabilities. This can be understood by looking at features the Moto X(the phone Motorola and Google created together) had. It included a virtual ear that got enabled with the words okay, Google Maps, Mail, Search etc.

• Many of Google’s Android partners had started to alter the android. Samsung, the biggest android user, for instance, had begun degrading it by switching out various parts like video and music player, phone dialer, notification centre, calendar, etc. It also started to hide Android and thus Google’s role in its smartphones. This was done using ‘TouchWiz’, a skin that was developed by Samsung itself and sued to paint all over Android. The instalment of this skin further undermined and degraded Android’s performance as it slowed down Android and wasted storage space.

The smartphones which Google developed alongside Motorola enabled it to install a pure android system in the phones, which showed technologically advanced features of Android.

Moreover, this step showed that Google can use this partnership to ramp up its own hardware business, promote Android and easily gain greater market share. Hence, it sent out a warning to the other partners to stop messing around with Android.

• Avoiding taxes was another reason for this acquisition. When Google acquired Motorola, it was a loss-making, money-bleeding company, with carried forward taxes. Google set off these losses with its profits and thereby avoided huge amounts of taxes.
• It also enabled Google to build better relations with television manufacturers, owing to Motorola’s set-top box system.

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Why did Google sell Motorola Mobility?

On January 29th 2014, Google announced that it sold Motorola to the Chinese technology firm, Lenovo for $ 2.91 billion (out of which $750 million were given by way of shares). While selling Motorola Mobility, Google retained its Advances Technologies and Projects Unit, which was integrated with the original Android team, and almost all the acquired patents. Let’s understand why this sale was made.

• In the Android phone hardware business, the margins are very less (not more than 2 to 3%). Google realized that unless it is a dedicated electronic manufacturer, it would be very hard for it to gain success in this industry.
• Under Google, Motorola’s operating losses were increasing . In fact, between the 2nd quarter in 2012 and 3rd quarter in 2013, its operating expenses amounted to $1.94 billion. Because of lesser margins, Google observed that it is impossible to turn it into a profitable business for at least a few more quarters.
• As a result of the acquisition, fear was created in the minds of the Android partners that Google would compete with them directly. They thus started to create or buy their own operating software. For instance, Samsung created Tizen and LG WebOS. By selling Motorola Mobility, Google reappeared as a neutral, honest Operating Software (Android) broker to the world.

Was the sale of Motorola Mobility truly a loss to Google?

Though on the face of it, the sale of Motorola Mobility appears to be a loss of nearly $10 million to Google, reality might be a little different. Let’s understand Google’s rationale behind this move.

• Financially speaking, Google actually made a profit out of this deal.
  • When Google acquired Motorola Mobility, it had inherited a cash pile of $3.2 Billion and deferred tax assets of $ 2.4 Billion, the net acquisition becoming $6.9 Billion ($12.5 Billion – $ 2.4 Billion – $ 3.2 Billion)
  • Further, Google sold Motorola’s set-top box business to the Arris Group for $2.3 Billion. It also sold Motorola’s factories to Flextronics for $ 75 million. This reduced the total acquisition to 3.85 Billion dollars. ($6.9 Billion – $2.3 Billion – $75 million)
  • At the end of this acquisition and sale, Google retained patents worth $5.5 Billion.
  • Thus, even after accounting for the loss of $2 Billion caused because of the operating expenses of Motorola Mobility, Google was still left with a profit of approximately $2 Billion. (-$3.85 Billion – $2 Billion + $5.5 Billion)
• This deal enabled Google to design a smartphone of wide appeal and transform Motorola Mobility into a healthy competition for Samsung and other Android smartphone makers, especially in the low-cost market.

Moreover, because of Lenovo’s amazing international presence ( it is the 4th largest smartphone seller worldwide), Motorola got an opportunity to reach the Asian markets, where cheaper phones are in high demand, and compete with Samsung and other Smartphone manufacturers there as well.

• Moreover, if we take into consideration the fact that Google sold the Motorola branded Android phones at the cheapest possible rates, it becomes evident that Google never wanted to maximize its profit through Motorola Mobility. Its actual aim was to get more people to use Android and thereby Google services, the way Google actually makes money. This aim was achieved by Google through this deal.
• Because of this deal, Google paid less than a billion dollars for patents worth $5.5 Billion. These patents would help Google in defending the Android ecosystem in the midst of the intellectual property battles.
• The deal forced Samsung and other Android smartphone manufacturers to reduce their android alterations. This is evident in the deal signed between Google and Samsung on 27th January 2014. Though this deal was a wide-ranging patent deal which will last a decade, in the provisions of this deal another important deal was hidden whereby, Samsung agreed to tone down TouchWiz, refocus on core Android apps and stop unnecessary customization.

This deal also strengthened the position of Android as a mobile platform. Thus making it tougher for hardware manufacturing firms like Samsung to launch its own OS like Tizen or LG to create its OS, WebOS.

Conclusion

Google’s strategy of acquiring Motorola at $12.5 Billion and selling it off to Lenovo at $2.91 came to be a masterpiece. It didn’t only gain monetarily despite the massive acquisition fee, but also created phones that pushed technology and promoted Android and the other Google services. Thus, it used the android platform which Motorola Mobility used and made it a gateway for its own promotion and advertisement.

Through this, it smacked down upon the Android smartphone manufacturers like Samsung who tried to take all the credit of the system and prevented them from hiding Google’s contributions. Moreover, the sale to Lenovo allowed Google to leave Motorola in the hands of a company that would be able to use it to offer competition to other manufacturers all around the world, especially in the Asian market.

Lastly, through this deal, Google acquired a lot of patents and also Motorola’s talented research division. The usefulness of these patents is still doubtful, but it can not be denied that Google made a profit worth billions of dollars by acquiring these.

Hence, clearly, Google played an amazing game through this deal and came out as the ultimate winner at the end.

References

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Case Study: Google’s Acquisition of Motorola Mobility

Motorola mobility, which was previously known as the mobile devices division of Motorola, until January 2011 when it was separated. The company produces smart phones, set top boxes, end to end video solutions and cable modems. As soon as automobiles were becoming popular, Motorola helped with entertaining the passengers, as it introduced the world’s first commercial portable cell phone. On the other Hand, Google a privately held company, founded by Larry page and Sergey Brin, two Phd students at the university of Stanford, it has been focused on technology innovations to help its users find the information with unprecedented levels of ease, accuracy and relevancy. Google primarily concentrated on the areas of search, advertising, operating systems and platforms, enterprise and hardware products. These programs include AdWords, AdSense, Google Display and Google Mobile, with Android and Google Chrome serve as its operating system and platforms.

Google generate revenues primarily through delivering advertising to promote products and services for businesses. Currently, it moves to new area, except for providing specific features to mobile device users, Google also operates in mobile segment, as it made an acquisition of Motorola Mobility Holdings Inc. (Motorola) on May 22, 2012.

Strategy, Finance and Valuation Behind the Acquisition

Google is considered as one of the top web property in the global market. It provides different organization from all sizes with measurable results. The base of Google is located in Silicon Valley, however they have offices all over the world. In 2011, Google managed to buy Motorola at a share price of $40 per share. This acquisition will enable Google to supercharge the Android ecosystem and will enhance competition in mobile computing. Motorola Mobility will remain a licensee of Android and Android will remain open. Google will run Motorola Mobility as a separate business. Google made a deal with Motorola Mobility to buy the latter company for the sum of 12.5 billion dollars. Motorola was the only smart phone company that didn’t join Microsoft windows phone reboot, which was rewarded by Google which bought the company for $12.5 billion. The move Google made showed a bold move into the hardware business. Google plans included Motorola whereas they would run Motorola Mobility as a separate business that only licenses the software. The reasons behind the acquisition of Motorola, was none other than the intellectual property, whereas the patent portfolio of the company was described as an asset that will strengthen the position of Google with respect to threats coming from Apple and other companies such as Microsoft.

According to the founder of Google and the CEO Lary page, he said ” “Motorola Mobility’s total commitment to Android has created a natural fit for our two companies. Together, we will create amazing user experiences that supercharge the entire Android ecosystem for the benefit of consumers, partners and developers. I look forward to welcoming Motorolans to our family of Googlers.”

On the other hand Motorola Mobility Holdings, Inc., is a manufacturer of cellular phones, whereas it combines innovative technology with human insights in order to connect people and enrich their lives. They are not solitary focused on cellular phones, as they manufacture wireless accessories, data delivery; and management solutions. During that time, Motorola were struggling in their market, to keep up with Samsung and HTC in Android innovation. For Motorola to get $12.5 billion for the company would be a great thing, as its is 63% premium over the share price. Even though the company was enjoying the launch of Droid and Droid X, however it was losing after Motorola XOOM wasn’t selling, furthermore delays occurred with the launching of the 4G smart phones. So the amount paid by Google only shows the how the CEO of Motorola Sanjay Jha has the ability to capitalize on a company desperate for patent protection.

According to Sanjay Jha, the CEO of Motorola Mobility, the transaction between Google and Motorola will offer major value to the stakeholders, offers new opportunities to the employees, customers and partners around the world. The partnership will take the android platform to another level, a level that will enable them to deliver better mobile devices.

Before the acquisition, took place, Google wanted to buy Motorola for a high-$20s, low-$30s per share, they made their first bid on the 1st of August, where they offered $30 per share, after 10 days from making the initial bid, Google made 2 more bids, the second bid was for the price of $37 and the final bid was for $40. But our question is, how could a company like Google, that is fond of number reach to this amount?

It all started n July, when Sanjay Jha, said that it would be hard for Motorola to stay alone as an entity if it sold a large amount of patents. This promoted Google to buy Motorola Mobility, so they requested to buy the company for the price of $30 per share in cash, since Motorola has almost 299 million shares, the total bid equated to $9 Billion in Cash. However, Motorola used Quatalyst partners (Investment Bankers) to make contact with Google in August Whereas they suggested that Google should pay the amount of $43.5 per share (New York times), that’s when Google increased the bid up to $37 per share, which was later declined by both Motorola and Quatalyst partners, but Google still had a chance, as they replied with an offer of $40.5 per share or higher.” Google made the offer of $40.00 per share, or $11.96 billion. With the addition of options the total amount reached up to $12.5 billion in Cash, which was finally agreed to by Motorola Mobility.

Google’s acquisition of Motorola Mobility is considered the largest in the company’s history, reaching the value of $12.5 billion, it is considered as the strongest merger and Acquisition within the sector of high-tech since the year 2007 according to data from Thomson Reuters.

This acquisition is considered overpriced to the media, as 63% premium is paid on the below par device makers. However many analysts and the media around the world believe that the purchase was only because of Motorola Patents, for this reason, Google should prepare itself to stand in court in case of law suits.

Some would argue that the reason behind the purchase is to start a war with Apple. After all, Google will start the process of manufacturing phones that could be ran on the Android platform, this mean that Google is looking for a head to head battle with the iPads and iPhones manufacturers that use Apple platform. With this acquisition, Google managed to enter into the business of manufacturing phones.

Regulatory Implications

In order for the acquisition to take place, Google had to get the approval from the US government, European commission and Chinese government. Google managed to get approval from the US government and European Commission in February 2011. The US government had its doubts to give approval as it wasn’t sure if the acquisition would harm the Cell phone market. As the government is on guard to see if Google would use patents in the wireless device industry and “will not hesitate to take appropriate enforcement action” against violators. On the other hand the Chinese government took more time to approve the transaction. As the Chinese law clearly states that any company that is selling its products with a revenue greater than $63 million domestically or $1.5 billion globally must get the approval from its ministry of commerce. However, Google must keep the operating system of Android free for all users and open for at least five years, in order to give approval of the acquisition.

Is Google’s acquisition of Motorola Mobility Working Out?

Everyone was surprised by the Google’s acquisition of Motorola Mobility, there are many good reasons why the business world was shocked. To begin with, its really rare to see a software company, moving into the hardware business. Could Motorola be the right choice for Google to purchase?

The main reason behind the Google’s acquisition of Motorola Mobility was the 17,000 portfolio of patents owned by Motorola mobility plus 7000 pending patent applications, which are mostly related to the mobile technologies. Before Google actually bough Motorola, they had lost around 6,000 patents that belonged to Nortel. A group of investors from different companies such as Microsoft, Sony and apple, who pitched in to pay the sum of $4.5 billion. This left Google out cold and started one of Google’s now infamous screed against the patent system. Google had to look for another source of patents, that’s why it settled for Motorola Mobility.

At the start of the merger, Google posted its first revenue report in July 2012, the report included Motorola acquisition, the overall numbers shown were actually good, which came as a shock. The total revenue reach up to $12.1 billion, which was 21% more than the same quarter of last year. On the other hand Motorola who had lost cash in 14 out of the last 16 quarters, was expected to drag Google’s cash flow down. Even though it was true, it wasn’t as bad as many analysts thought. As almost $1.25 billion that Google earned came from none other than Motorola, plus almost $840 million that came from selling Motorola Handset. Even though, the sales of Low end phones was still decreasing, other phones such as Motorola’s Droid Razr maxx was selling really well. If it was still working as a separate entity, it would have almost the total sum of $38 million, which is not really a huge number, as it only forms about 3% of the total revenue generated.

But is it really working out between the two companies? As Google’s main reason behind the acquisition was the patents. These patents, are with no doubt bringing Google healthy royalty revenue. However, since the acquisition took place, Google tried to assert the patents owned by Motorola against other competitors such as Apple and Microsoft with no luck, it also tried to protect Android, but still there are no produced results. Instead of showing good result, the acquisition is actually attracting negative attention from around the world, with it was from Judges, Regulators or even both. According to Duncan, he says ” Google may have turned the patent fight between high-tech companies from a high-stakes bout to an old-school, 40-round, bare-knuckle brawls – and that’s pretty much the opposite of what patents are supposed to do”.

Google Sells Motorola to Lenovo

After one and a half year, Motorola Mobility LLC, which owned by Google has been sold again to Lenovo, which a Chinese company whom an expert in a computer manufacturing for only $2.91 billion. Most of people said that Google’s decision to sell Motorola Mobility is a fool.

Google has several reasons why they sell Motorola Mobility to Lenovo. The first reason is Google only bought Motorola Mobility for its patents, not for manufacturing. Because, Motorola had a massive patent library that can be used defensively against Apple’s patent attacks on Android licensees which makes the Android or Google’s customer worried. Google acquired Motorola Mobility, including its approximately 17,000 patents for $12.4 billion in May 2012 (all figures in US dollars). They sold the set-top box business (and 1,000 patents) to Arris in December 2012 for $2.35 billion in cash and stock. And now they’ve sold the handset business (and 2,000 patents) to Lenovo for $2.91 billion. Now, the purchase of Motorola came with $2.9 billion in cash, so what we’re left with is $4.24 billion for around 14,000 patents. (You can shrink that number further by taking into account things like $2.4 billion in deferred tax assets Google obtained in the original acquisition, but we’ll set that aside for the sake of this argument.) According to regulatory filings, Google had valued the original 17,000 patents at $5.5 billion (by far the biggest piece in their valuation of the acquisition). Now, anyone in the patent licensing business will tell you calculating a per-patent valuation for a portfolio is an over-simplification. But with all necessary disclaimers, this works out to around $294,000 each, and that they paid $303,000 each for the 14,000 they still have. That’s pretty close to their original valuation. And does that valuation hold water? Probably the easiest checkpoint is Rockstar’s purchase of around 6,000 Nortel patents for $4.5 billion. That’s $750,000 per patent.

The second reason is Google can become a neutral company as an operating system broker for many vendors and make the money circulate faster than when with Motorola. Because, once Google bought Motorola, many big companies like Samsung and LG start to create their new operating system for mobile like Samsung’s Tizen. From these two reasons, Google’s decision to sell Motorola Mobility to Lenovo is a wise decision and profitable.

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