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Google Makes Gargantuan Grab for Motorola

MMI buyout a clear show of smartphone intentions

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Google Motorola buyoutGoogle (NASDAQ:GOOG) 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) 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) 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). Think of it like Windows on your laptop where Microsoft (NASDAQ:MSFT) 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.

Article printed from InvestorPlace Media,

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