Why Google’s acquisition of Motorola is very risky

Monday’s shock story was that Google is buying Motorola Mobility, the handset division of Motorola, for a whopping $12.5 billion. That’s a 63% premium and represents a high-risk investment for Google who spent about a third of its cash pile on it.

Google i forsvarsposisjon

The massive acquisition in fact quadruples the $3.1 billion Google paid for DoubleClick in 2007, the second biggest acquisition by Google, and adds 80% more employees (i.e. Google almost doubled). The move was a big surprise which for the first time puts the company squarely in the smartphone hardware — rather than solely software — business.

I’m frankly amazed that the Google stock only declined 1.2% during Monday as a result of the acquisition, because this is in my opinion a very risky gamble. Why? [Update: Dropped another 3.3% during the Tuesday]

For starters, Google is making a major move outside its core. Hardware manufacturing is a low-margin commodity business that is very much about maximising efficiency in the supply chain, factories, physical distribution, these sorts of things. Is this what Google knows? Hardly. Business model diversification of this kind is more often than not a very bad idea in mature economies (where you don’t need enormous clout and resources just to battle bureaucracy and immature market conditions, find financing etc).

Secondly, the deal might very well create major channel conflict. They insist Android will stay open, yet how do HTC and Samsung, two of the leading Android-based smartphone makers, really feel about the fact that their partner will now compete directly with them for hardware sales? (I mean really feel, not what they say publicly.) It’s hard to imagine Google not giving Motorola any preferencial treatment. For example, Google clearly has bundling opportunities that might piss off partners if acted on.

Further, Motorola is enormous. Google has just increased the size of its company by 80% as it added 19,000 employees to its prior 24,000. Does Google really have the management and culture to handle that? Doubt it.

Lastly, the deal appears to be mostly a defensive move, not an offensive one, in a sort ‘nuclear arms race‘. How can insurance (in the form of patents) against legal attacks be worth $12.5 bn and the risks and challenges it brings? This does not really indicate that Google actually has a positive long-term strategy to become something grander and more integrated by involving Motorola Mobility. It seems merely to be a short-termist tactic as protection.

The bet also leaves a big invitation open to Microsoft which now remains the only big mobile operating system maker that does not own its own hardware business.

To me this deal just raises a lot more questions, doubts and challenges than it provides answers. For example, is this an acknowledgment that, in smartphones, Apple’s integrated hardware-software ecosystem is superior to the PC model of a common software platform crossing many hardware providers? If they bought Motorola just for the 17k+ patents, are they planning to sack all Motorola staff and sell off all assets?

This will be a test of Google under ‘old-is-new-again’ / war-time CEO Larry Page. Handled correctly, it could perhaps be a terrific deal that could pay for itself in a few years’ time while also reinforcing Android’s long-term viability. But then again it might not, it’s either very smart or very stupid. In any case, it’s very risky.

What do you think? Share your thoughts below!

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3 thoughts on “Why Google’s acquisition of Motorola is very risky

  1. How might Google, a company famously fond of numbers and maths, have arrived the final bid of $12.5 bn? The eagle-eyed industry analysts at Frost & Sullivan offer a plausible answer. In a commentary issued on August 16th they note:

    “Motorola has a portfolio of 24,500 patents and patent applications that instantly bolsters Google’s strength in the IP war. Looking at some recent patent auctions and using some simple math can show why these patents were indeed the target of Google’s acquisition.

    Using one of the industries recent patent auctions as a baseline, in December of 2010, Novell sold off its portfolio of 882 patents for $450 Million. A simple division calculation leads us to a value of $510,204.08 per patent. Why not round that figure off you ask? Well, let’s look at the patent value of the Motorola acquisition.

    Forgetting that Motorola also makes mobile phones, let’s say the entire value of the acquisition was in their 24,500 patents and applications. At a $12.5 billion price tag, that equates to…drum roll please…$510,204.08 per patent. Can anyone guess what heuristic they used in the board room in valuing the deal?

    In the Motorola acquisition, Google bought a patent portfolio and got a mobile phone business thrown in for free.” http://bit.ly/oX8nKq

    So, perhaps they thought that 12.5 bn is a good price for the patents as described above, and further that the cost of managing Motorola Mobility under Google, as well as they risks involved, will hopefully be covered by everything else in Motorola but the patents. Realistic?

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