If Google really bought Motorola for the patents alone, we should expect massive layoffs as they wind down the phone manufacturing business.
If, as many have speculated, Google actually wants to follow Apple into the integrated software/hardware market, then this is a bet-the-company decision that will either see Google mired in a failed merger on the scale of AOL/Time Warner, or if successful it will provide a growth engine for the next decade and badly-needed diversification.
I think it's pretty hard to look at this deal purely from a technical analysis perspective, since no one except a handful of senior staff at Google really know what the plan is.
This is true. The CEO of Motorola Mobility came on a conference call with us (here at Motorola in Beijing) and told us that they didn't really know much more than we did, and to stay tuned. They have told us to "refrain from gossip or speculation", as the deal is still very fresh and far from closed.
It wouldn't surprise me at all to see them spin Motorola right back out into a separate entity. It would actually make a lot of sense. Google gets their patents and a very cooperative manufacturer, without the worry of managing Motorola day-to-day.
1) Google will not be able to close the deal by early 2012.
2) Current related litigation is not helped.
3) No one knows how much protection the patents will add.
4) Moto will have an adverse impact on financials going forward.
At the end of the interview, Kessler comments that Google is making this move with a long-term view, while S&P is "obviously" looking at this transaction on a "micro-basis".
Your last sentence, made me think. We must not forget that this is short term investment advice. They are not saying that no one should ever buy Google stock again.
2) I don't understand. Just the threat of Google launching that missile at Apple and friends has to severely curtail patent litigation. If Apple knows that Google will soon have the ability to deliver a haymaker of their own, they are MUCH more likely to negotiate a cease-fire.
GOOG's market cap is $174B. A $12B cash purchase for Motorola Mobility Holdings Inc is not consequential to GOOG's balance sheet. (But it does seem like a big premium given that that price is above their 10 year high.)
There is obviously integration risk, but I believe the integration risk is low compared with the potential upside.
The reality of our world now is that almost everyone in every country living above poverty will own a smart phone.
Buying Motorola gives GOOG the ability to capitalize in a different way than just search and whatever value they get from the patent acquisition is bonus.
5 years from now, this will be viewed as an intelligent acquisition which provided a lot of value to GOOG, but most likely not the way most people are looking at it today.
*Scott's micro-basis is not a good way to look at this acquisition and by not looking at the big picture (mobile growth) he may have made a serious error.
12/174 =~ 7%, which is a significant amount of any company's market cap, and very consequential to the balance sheet.
I've never heard of such a large integration that has ever worked in the tech field; what percentage of Motorola's employees would be hired by Google through their normal rigorous procedure?
Large integrations have always been failures; this is definitely a bold move, but based on the history of these types of purchases elsewhere in the tech field, and the difference in corporate cultures, the best possible course would be to not integrate at all.
You must ask this question of every single piece of stock advice ever given freely or sold. If you knew about future price movements with some degree of accuracy, the least profitable thing you could do would be to tell others.
I think these moves are S&P's aattempt to come back from the massive hit their credibility took from rating toxic MBS as AAA. They're trying to prove they still have some market utility by making some predictions.
I'm not convinced that Google doesn't know the manufactoring nor device game. For one, they have designed and provisioned their own servers, racks, and data centers for "ever." As well, they have had their hands in building out both Nexus devices.
Servers in a data center are a very different beast than portable devices. They also have far fewer regulatory restrictions than cell phones; you don't need to register your custom server with the FCC, after all.
Let's say Microsoft and Apple can only go after the handset makers for whatever reason, and they win. Thst means handset makes will drop Android for WP7 or MeeGo.
Now that Google has is own cell phone manufacturer, it will still be able to produce an Android phone.
Patents I'm sure are important too, but being able to control manufacturing is crucial if the handset makers bail.
I'm not sure how this works, but the Rockstar Consortium, or whatever nonsense, that bought up the Novell patents, provides legal cover against any entity outside of that consortium right? Google could conceivably provide something similar to Android partners.
Why would Google necessarily care about their S&P rating? They have enough cash that they don't have to issue bonds, similarly with equity - I doubt it changes the dilution constraints to issuing new equities much. Short term debt? Nope, that cash again. Financial easing of big purchase deals? What banker is going to pass up working with Google?
This isn't about Google's bond-worthyness or financing corporate debt, but instead about their stock's perceived value. (The article talks about GOOG being rated "buy" versus "sell", not AAA or B which are bond terms.)
S&P ratings do affect how Google will run the business: If Google's stock takes a hit, employees get restless and are more likely to look elsewhere for employment. Employees aren't always long term focused in stock prices. Google could use this as an excuse to buy back their own shares to drive up value.
Actually, Google did issue bonds earlier this year[1]. The interest they were paying was so cheap it was better than spending cash. They pay 1.25% for a 3 year bond, up to 3.625% for a 10 year bond.
Theoretically I guess Google could care about their S&P credit rating (as opposed to this stock rating) if it made it harder for them to sell them in the future. Judging from how low the rate they had to pay on those bonds I suspect they wouldn't have any trouble selling them anyway.
Their credit rating is very unlikely to drop while they are highly profitable and sitting on a pile of cash though.
Margin differences between industries are obvious to a Sell-side/buy-side analysts. The analyst in this case talks about the difference in margins like a lower overall margin for google would be bad.
It won't be bad because Google will now have additional revenue (&profit) at that low margin and will be operating 2 different businesses. If anything is scary about this transaction it is the integration risk. Lower overall margins are not an issue for valuation.
This particular sell-side analyst may be using a model which does not value the company in 2 pieces which will give him a lower valuation than it should.
Google's new valuation should look like this:
Google's business prior to acquisition + Motorola's valuation + additional gains or losses from integration/synergies = Google's new valuation.
*also note that in finance valuations, the lower standard deviation of returns, the lower the risk premium so having Motorola may actually increase the valuation. On the other hand those buyers of google who wanted pure play search/cloud exposure may sell off google's shares.
[+] [-] gamble|14 years ago|reply
If, as many have speculated, Google actually wants to follow Apple into the integrated software/hardware market, then this is a bet-the-company decision that will either see Google mired in a failed merger on the scale of AOL/Time Warner, or if successful it will provide a growth engine for the next decade and badly-needed diversification.
I think it's pretty hard to look at this deal purely from a technical analysis perspective, since no one except a handful of senior staff at Google really know what the plan is.
[+] [-] jdelsman|14 years ago|reply
[+] [-] enjo|14 years ago|reply
That $12B will be quickly absorbed.
[+] [-] joelhaus|14 years ago|reply
http://www.bloomberg.com/video/74044556/
His justification was as follows:
At the end of the interview, Kessler comments that Google is making this move with a long-term view, while S&P is "obviously" looking at this transaction on a "micro-basis".[+] [-] ma2rten|14 years ago|reply
[+] [-] enjo|14 years ago|reply
[+] [-] wtvanhest|14 years ago|reply
There is obviously integration risk, but I believe the integration risk is low compared with the potential upside.
The reality of our world now is that almost everyone in every country living above poverty will own a smart phone.
Buying Motorola gives GOOG the ability to capitalize in a different way than just search and whatever value they get from the patent acquisition is bonus.
5 years from now, this will be viewed as an intelligent acquisition which provided a lot of value to GOOG, but most likely not the way most people are looking at it today.
*Scott's micro-basis is not a good way to look at this acquisition and by not looking at the big picture (mobile growth) he may have made a serious error.
[+] [-] epistasis|14 years ago|reply
I've never heard of such a large integration that has ever worked in the tech field; what percentage of Motorola's employees would be hired by Google through their normal rigorous procedure?
Large integrations have always been failures; this is definitely a bold move, but based on the history of these types of purchases elsewhere in the tech field, and the difference in corporate cultures, the best possible course would be to not integrate at all.
[+] [-] Eliezer|14 years ago|reply
[+] [-] ewanmcteagle|14 years ago|reply
[+] [-] mkramlich|14 years ago|reply
[+] [-] Estragon|14 years ago|reply
[+] [-] thezilch|14 years ago|reply
[+] [-] bdonlan|14 years ago|reply
[+] [-] adjwilli|14 years ago|reply
Now that Google has is own cell phone manufacturer, it will still be able to produce an Android phone.
Patents I'm sure are important too, but being able to control manufacturing is crucial if the handset makers bail.
[+] [-] bluedanieru|14 years ago|reply
[+] [-] digikata|14 years ago|reply
[+] [-] MattLaroche|14 years ago|reply
S&P ratings do affect how Google will run the business: If Google's stock takes a hit, employees get restless and are more likely to look elsewhere for employment. Employees aren't always long term focused in stock prices. Google could use this as an excuse to buy back their own shares to drive up value.
[+] [-] nl|14 years ago|reply
Theoretically I guess Google could care about their S&P credit rating (as opposed to this stock rating) if it made it harder for them to sell them in the future. Judging from how low the rate they had to pay on those bonds I suspect they wouldn't have any trouble selling them anyway.
Their credit rating is very unlikely to drop while they are highly profitable and sitting on a pile of cash though.
[1] http://www.reuters.com/article/2011/05/20/us-markets-credit-...
[+] [-] 6ren|14 years ago|reply
[+] [-] wtvanhest|14 years ago|reply
It won't be bad because Google will now have additional revenue (&profit) at that low margin and will be operating 2 different businesses. If anything is scary about this transaction it is the integration risk. Lower overall margins are not an issue for valuation.
This particular sell-side analyst may be using a model which does not value the company in 2 pieces which will give him a lower valuation than it should.
Google's new valuation should look like this:
Google's business prior to acquisition + Motorola's valuation + additional gains or losses from integration/synergies = Google's new valuation.
*also note that in finance valuations, the lower standard deviation of returns, the lower the risk premium so having Motorola may actually increase the valuation. On the other hand those buyers of google who wanted pure play search/cloud exposure may sell off google's shares.