US-based Internet search giant Google has sealed its biggest deal yet, buying Motorola Mobility for $12.5 billion - or R89 billion - a premium of 63% on Motorola's Friday stock closing price.
Google says buying Motorola Mobility will “protect” it from its chief competitors, Microsoft and Apple. The deal follows Microsoft's recent purchase of Skype for $8.5 billion, and signals the start of a new wave of consolidations as the big three battle it out to dominate the communications space.
Patrick Pichette, Google's senior VP and CFO, says the deal is “significant”, but the company has the financial flexibility to pursue other opportunities. He notes the US company has made more than 120 acquisitions in the last few years.
Last month, cash-flush Google reported record revenue of $9 billion for the second quarter of the year to June, a 32% gain on the previous year. It generated $3.52 billion in net cash from operations, and ended the quarter on a cash pile of $39.1 billion.
Google CEO Larry Page says buying Motorola Mobility will help protect Android from threats from Microsoft, Apple and other companies. In a statement, Google says the deal will “enable Google to supercharge the Android ecosystem and will enhance competition in mobile computing”.
Apple is renowned for its iPhone and iPad devices, and has sold 9.25 million tablets and 18.65 million iPhones around the world. It cannot keep up with the demand for its tablets.
In February, Nokia and Microsoft announced a strategic partnership that saw the handset manufacturer agree to adopt Windows Phone as its principal smartphone strategy. Google's buyout of Motorola Mobility sparked speculation that Microsoft would acquire Nokia.
Motorola Mobility was spun out of Motorola earlier this year, when it split its business into two: Motorola Mobility houses the company's mobile and home business units, while Motorola Solutions is home to products targeted at the enterprise and governments. Motorola Mobility will remain a separate entity within Google.
Super-chuffed
Page, who co-founded Google in 1998 with Sergey Brin, is excited about the deal, although buying Motorola Mobility brings with it competencies that are not core to Google. Google is also pleased to be able to protect its Android operating system, although it will remain open, he says.
Motorola Mobility is a dedicated Android partner after betting “big” on its choice of the platform in 2008. The mobile operating system, launched in 2007, is Google's smartphone and tablet solution.
“It was a smart bet and we're thrilled at the success they've achieved so far. We believe that their mobile business is on an upward trajectory and poised for explosive growth,” says Page.
Motorola Mobility's portfolio includes converged mobile devices such as smartphones and tablets; wireless accessories; end-to-end video and data delivery; and management solutions, including set-top boxes and data-access devices.
More than 150 million Android devices have been activated worldwide and more than 550 000 devices are connected daily through a network of about 39 manufacturers and 231 carriers in 123 countries, says Page. “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.”
Innovating
Motorola Mobility CEO Sanjay Jha says: “Through this combination we will be able to do even more to innovate and deliver outstanding mobility solutions across our mobile devices and home businesses.”
Jha says Motorola Mobility will push the boundaries of innovation. The device company has a close relationship with carriers in the home space, and there is a move towards converging mobile and set-top boxes, which the company aims to tap into, he says.
Google Mobile senior VP Andy Rubin says the combination of the two companies will enable Google to break new ground for the Android system. “However, our vision for Android is unchanged and Google remains firmly committed to Android as an open platform and a vibrant open source community.”
Google will continue to work with all of its valued Android partners to develop and distribute innovative Android-powered devices, says Rubin.
“The combination of Google and Motorola will not only supercharge Android, but will also enhance competition and offer consumers accelerating innovation, greater choice, and wonderful user experiences. I am confident that these great experiences will create huge value for shareholders.”
Perfectly logical?
Google's acquisition of Motorola Mobility is good deal for both parties, although some Android partners are becoming increasingly annoyed with Google's growing world domination, says Stela Bokun, senior analyst at Pyramid Research.
Bokun says Google will be able to complete its offer and position itself as an end-to-end player, and will now have control over the secure element of all Motorola's near-field communications-enabled phones that will support Google Wallet.
Under strong competitive pressures, Motorola lost roughly 16% of its market share between 2006 and 2010. According to Pyramid's second quarter Smartphone Forecast, Motorola is expected to keep about 3% of the market through 2016.
Things might change for the better for the original equipment manufacturer on the back of the news of the buyout, says Pyramid.
However, the deal may not be so good for other Android handsets. “In the medium term, I expect that today's announcement will result in a stronger commitment to Windows Phone by Samsung, LG, HTC, and ultimately even Sony Ericsson,” says Bokun.
Steven Ambrose, MD of WWW Strategy, says the synergies are great and the buyout is “perfectly logical”. He explains Google is becoming a communications company, shifting from being a pure search entity.
More acquisitions will be made, says Ambrose, as Apple, Microsoft and Google seek to fill in the gaps in their portfolios. The companies are battling it out to become the biggest and broadest suppliers of communications and technology services, he says.
Google's buyout of Motorola Mobility strengthens it against Microsoft, which is moving from being a software giant to a services player, Ambrose adds.
Ambrose says Google paid a “Silicon Valley premium” for Motorola Mobility. There is too much money chasing too few deals, as there are not that many companies the big three can acquire to bolster their positions, which would account for Google's 63%, he adds.
However, spending is based more on perception than cold financial reality, says Ambrose. Although Motorola grew revenue 28%, to $3.3 billion in the second quarter of this year, it reported a net loss of $56 million, compared with an $80 million profit a year ago.
Ambrose says Google has the cash, and will pay whatever is demanded, the same way Microsoft did with Skype. “That's how bubbles develop,” he says.
The deal is subject to approvals and is expected to close by the end of 2011 or early 2012.
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