Google Makes Gargantuan Grab for Motorola

by Jeff Reeves | August 15, 2011 9:40 am

google logo Google Makes Gargantuan Grab for MotorolaGoogle (NASDAQ:GOOG[1]) isn’t afraid to go on shopping sprees. With more than 75 acquisitions since 2006 — from the $3.1 billion buyout of DoubleClick to bolster its online advertising presence, to the $1.65 billion buyout of YouTube — the cash-rich tech giant has made these deals a normal part of its growth plans.

But the announcement this week that Google will be snatching up Motorola Mobility (NYSE:MMI[2]) for about $12.5 billion is by far the most dramatic deal in the history of the company. The partnership could forever change the makeup of Google and the landscape of the smartphone business, and it might finally create a gadget that can give Apple (NASDAQ:AAPL[3]) and its iPhone a run for the money.

Here are the specifics of the deal: The $12.5 billion price tag is calculated based on a $40 per share cash offer of Motorola Mobility stock, an impressive 63% premium over Friday’s close.

Why would Google spend so much dough on this buyout? First, because its Android smartphone software has huge momentum right now, and the company is looking to strike while the iron is hot. And second, because even if Google can’t leapfrog Apple to become the premier smartphone brand, it will make a heck of a lot more money by cutting out the middle man.

You see, Google’s Android operating system runs on third-party devices from manufacturers including HTC, Motorola and Samsung (PINK:SSNLF[4]). Think of it like Windows on your laptop where Microsoft (NASDAQ:MSFT[5]) only gets paid for the software. The display, chips and other hardware components are all revenue streams for different companies.

This is in contrast to Apple, which offers its iconic iPhone to consumers start to finish — from the software on the device to the hardware manufacturing to even the point of sale in Apple Store retail outlets nationwide. It’s no surprise, then, that the iPhone represents about half of all Apple’s revenue. In the second quarter of 2011, the iPhone tallied $12.3 billion out of $24.7 billion.

When you can cut out the middleman every step of the way, you streamline operations and cut costs. That is part of Apple’s success — and a model Google clearly wants to imitate.

With well more than $35 billion in cash on hand, Google had been on the prowl to find its own version of the iPhone. This summer it made a move for wireless parents from now-defunct telecom Nortel Networks but lost out in the bidding war[6] for the rights. With that opportunity missed, Google wasn’t willing to wait any longer — and spent about a third of its total cash on this massive Motorola deal.

Of course, the really expensive question consumers and investors alike are asking right now is “Can Google pull this off?” On paper, the move seems like a remarkable opportunity. Google clearly has made its mark with the Android software for mobile devices. It currently is the most widely installed in the world, by one report[7] appearing on 43.4% of all new smartphones sold in the second quarter of 2011 and in another[8] totaling about 48% of global market share. And Motorola is one of the biggest smartphone brands — not just in the U.S., but also in markets like China, where growth is red-hot in the mobile market.

Of course, there are big risks here, too. Although Google has been making big strides in recent years with its Android software, its in-house handset known as the Nexus One flopped in 2010. And let’s not forget that Apple, the reigning king of mobile, likely will be making a huge splash this fall with the release of its iPhone 5. Oh, and those pesky Windows Phone and BlackBerry devices still are hanging around — not to mention the innovative products being created in some twenty-something’s basement that we haven’t heard of yet.

The tech marketplace is constantly evolving, so it’s impossible to predict what will come next. But one thing is certain: Google’s big bid for Motorola shows it is not content with its spot in the food chain and will do whatever it takes to recreate the iPhone’s level of smartphone success.

Jeff Reeves is the editor of InvestorPlace.com. As of this writing, he did not own a position in any of the stocks named here. Follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook.

Endnotes:
  1. GOOG: http://studio-5.financialcontent.com/investplace/quote?Symbol=GOOG
  2. MMI: http://studio-5.financialcontent.com/investplace/quote?Symbol=MMI
  3. AAPL: http://studio-5.financialcontent.com/investplace/quote?Symbol=AAPL
  4. SSNLF: http://studio-5.financialcontent.com/investplace/quote?Symbol=SSNLF
  5. MSFT: http://studio-5.financialcontent.com/investplace/quote?Symbol=MSFT
  6. lost out in the bidding war: http://dealbook.nytimes.com/2011/07/01/apple-and-microsoft-beat-google-for-nortel-patents/
  7. by one report: http://www.marketingmagazine.co.uk/news/1084615/Android-doubles-share-smartphone-market/
  8. in another: http://www.eetimes.com/electronics-news/4218585/Canalys-Android-smartphone

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