Monday, August 15, 2011

First reaction to Google/Motorola announcement

[Update] I have meanwhile done a follow-up post commenting on the exorbitant $2.5  billion break-up fee and the concerns and desperation it reflects. [/Update]

Yesterday I blogged about Motorola Mobility's statement on plans to use its patent portfolio as a key differentiator against other Android device makers, and I concluded that post with a reference to speculation that this could have been part of a strategy on Motorola Mobility's part to get acquired by Google.

Today Google announced an agreement under which Google will acquire Motorola Mobility for $12.5 billion, provided that the deal isn't blocked by regulators and that no third party outbids Google.

There's no question that the purchase price -- a premium of about 60% over Motorola's last closing price -- is to some degree related to Motorola Mobility's patents, but perhaps to a lesser degree than most people think.

I just checked on Wall Street's reaction (via Google Finance). As I write this (shortly after 4:40 PM on Monday, August 15), Google is down by 1.5%, while Apple is up by 2% and Microsoft by 1.25%. Motorola Mobility is trading at $38.32, meaning that the risk arbitrage experts buying the stock now will have about a 4% return if the deal goes through. There's also upside potential if anyone outbids Google (which happened before on other deals) -- and a certain downside risk given the huge premium. Finally, InterDigital has taken a serious hit (approximately -20%), presumably because of the assumption that Google's intent to acquire Motorola Mobility substantially reduces the likelihood of aggressive bidding by Google for that company.

I said before on Twitter that Motorola's patent portfolio didn't deter Apple and Microsoft from asserting patents against them in the past. [Update] Regarding Apple's attack on Motorola, I've done a follow-up post that leaves no doubt about the fact that Apple was the aggressor. [/Update] Those lawsuits are ongoing, and I listened in to Google's and Motorola Mobility's conference call explaining the deal. Google's chief legal officer said that those lawsuits would continue unchanged as long as Motorola Mobility is independent, but indicated that after the possible closing of the deal, Google's interests would come into play.

Generally speaking, if Google acquires control over Motorola Mobility (MMI) and tries to leverage MMI's patents for purposes going beyond what MMI would have demanded in such negotiations as an independent entity, it probably won't be easy for them to agree on settlement terms with those other companies.

It would be a mistake to look at this as just (or primarily) a patent deal. We're looking at a deal that would fundamentally change Google's Android-related business model. Google assures that Android will continue to be available on open source terms, but Android's openness has previously been doubted, including by a partly EU-funded study. The likes of Samsung, HTC and LG obviously don't have any other choice than to say at this point that they welcome the deal. They will continue to say that for some time. They obviously weren't going to bash the deal in public. But there's no way that they can compete with a Google-owned Motorola Mobility on a level playing field. Google said in the conference call that it would operate Motorola Mobility as a separate business, but the price Google agreed to pay is not reflective of the value of Motorola Mobility as a stand-alone business: that's the kind of price paid by a strategic buyer who plans to use the acquisition target as leverage for its (Google's) own core business.

I do, however, retract something I said after the Nortel auction. I doubted Google's commitment to Android. Looking at this $12.5 billion offer, there's no question that Android is a strategic priority to Google with respect to its core business, in which it has a dominant market position.

With respect to ongoing and future patent disputes (besides the ones in which Motorola is embroiled with Apple and Microsoft), there are many patent holders to whom this deal doesn't matter. I doubt that Motorola Mobility holds a lot of patents that Oracle would be concerned about (while some of the patents Google recently bought from IBM could be useful against Oracle). There are medium-sized companies like Gemalto and Vertical Computer Systems. They most probably won't be affected. And there are numerous non-practicing entities trying to collect royalties from Android device makers. Since they don't have products of their own, no one can assert any patents against them. What will certainly change is Google's need to engage in inbound licensing from such patent holders. Those types of patent holders used to focus primarily on device makers, such as Motorola. Google will now have to deal with them to a greater extent, but they will likely continue to shake down third parties as well.

Are there ways that Google can extract value out of the proposed transaction? Yes, it can be useful to Google itself in many ways, even though it won't make all of those patent disputes go away all of a sudden. But is it going to be a good thing for Android at large?

[Update] I have meanwhile done a follow-up post commenting on the exorbitant $2.5  billion break-up fee and the concerns and desperation it reflects. [/Update]

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