That's like saying Apple is worth $600 billion, Motorola is worth "only $12 billion", but has 1/10 of Apple's market share, so therefore it must be a great deal to buy Motorola. Wait, actually that's exactly what Google thought - and they quickly saw the error in that sort of thinking after they purchased it.
Do you see how that argument is flawed? Leaders in a market tend to be worth much more and have much higher profits than even the 2nd player in the market, let alone the third or fifth. When you have a small percentage of the market, it's also much more difficult to make something out of it, than it would say for a market leader to go from 30% market share to 50% market share (and billions of dollars more in revenue).
We could repeat the argument for a small social network that has a much lower market value than Facebook per user, and so on.
Exactly. Let's not forget that "Google bought Motorola for $12.5B, sold it for $2.9B, and called the deal ‘a success’", purely for Motorola's patent portfolio.
From that article: "Which again leads to the question: why did Google buy Motorola? The real answer is worth $12.5 billion."
I love how people keep trotting this number out. Nevermind the fact that Moto had $3 billion in cash[1], which immediately became Google's cash when the purchase went through, so the real price was closer to 9.5 billion. Motorola also had 24,500 patents in its portfolio[2]. Apple, MS, and RIM paid 4.5 billion for 6,000 Nortel patents not long before the Moto sale.
Perhaps, but it's not like Google lost much by buying Motorola.
"I think the Motorola transaction has been a success for us. Financially, we bought the asset for $12.5 billion. It had $3 billion in cash; we were able to sell the Home division for $2.5 billion; we ended selling the handset division for $3 billion. There were some other tax assets as well. When you work through the math, you realize we spent between $2.5 billion and $3.5 billion for the patent assets. At the time, the nearest comparable transaction was the Nortel patent auction where Microsoft and Apple teamed up to buy that asset for $4.5 billion. And there’s a good argument that the Motorola patent portfolio is a better portfolio."
$15 billion whole, so I think the mobile division was worth at least 2x that, especially if we consider that when acquired, companies usually pay a premium over the market price. Motorola was like $9 billion at the market price when Google bought it for $12.5 billion.
"And it's pretty clear that when you account for the costs of the Motorola purchase, Android has been a pretty epic failure. And yet as a product it's an enormous success—the most popular smartphone OS on the planet and even more than that a huge driver of smartphone adoption."
This does not change what I said in my previous comment. Even if you relate it JUST a business aspect and ignore that you can't do that. Lets look at googles stock breakdown.
Motorola makes up 2% of googles worth, where Mobile Ads make up 34%. Granted this can be assumed to not be completely Android, even if we assume that only 25% of that is from android devices, thats 8.5%. So 8x Motorolas worth and about 21Billion based on Googles 245B market cap. So a worth of 21 Billion in worth is an "epic failure"? Ok...
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.
Analyses such as this suffer from an overly simplistic model that is wholly detached from actual business reality. One where every company collapses down to one single thing they do.
But that has never been the case for Google, or pretty much any company for that matter. This isn't "new", and Google has always been diverse.
Do people remember what Google's original "business model" was (meaning "how can we scramble to pay the bills on the technology we've built")? They sold search appliances for business: You could buy little rack mount units that would build a search corpus of your network and allow in house searching. The search engine was largely just a demonstration that Google knew search.
They grew from there. Over the years they've sold virtual machines, mail accounts, backup storage, computer cycles, smartphones, entertainment units, laptops, smart glasses, and eventually self-driving car technology and robotics. The Nexus line started as developer units, but it grew into a mainstream set of technologies that clearly Google wishes was much more successful and lucrative. Recall the ill-conceived Nexus Q.
Because they're a big, diverse company. They want to make money however they can. While the common sentiment on the Motorola purchase is always the "for patents" line, is it not possible that they wanted to start benefiting more financially from Android, getting directly in the business that Apple was make so much money in? Success or failure is irrelevant, Google's actions have spoken loudly that they want Motorola to succeed as a device maker, benefiting Google in the long run.
There is nothing new here. Company wants to leverage their strengths to make money. In the same way Apple has never been only a smartphone or computer hardware company -- they want to make a little coin on that app you purchase, the software you buy, the movies you watch, the music you listen to, the services you use, and even the ads they feed you. In the real world businesses tend to be like that.
> At $12.5B, Motorola is Google’s largest acquisition to date. Google paid $40 / share in cash, but received ~$11 / share in cash and $8 / share in deferred tax assets. Thus the value ascribed to operations + patents was about $21 / share, or $6.3B, reflecting a multiple of ~0.5x sales and 12x EBITDA. Now adjusting this further for the $2.35B total consideration Google is expected to receive for the Motorola Home business, we get a purchase price of just under $4B for Motorola's handset business and patent portfolio (17K patents and 7.5K patent applications).
I don't recall any analysis of the Google/Motorola deal pointing to a rationalization like this. I do recall Motorola's CEO announcing on an earnings call that if Motorola didn't soon find market sucess with Android it would be willing to start suing other Android ODM partners with its patnet portfolio. Given how quickly Google cancelled all its other product lines, and even sold off the cable box and network equipment business, and then finally sold to Lenovo, it seems like it was always clear in retrospect that Google bought Motorola to peaceably unwind without causing a civil war to the whole platform ecosystem they were building. That being said, I think you did very accurately call out the parent comment's reasoning and exactly what's wrong with it in cases like this. When companies are at a deep, deep discount to their market-leading peers there's usually a reason.
On the one hand, this makes total sense to me. On the other, how could Google not have sounded out their partners before deciding to compete with them? When you buy something for $12 billion, hopefully there's a little forethought involved.
Also, does anybody know what the Motorola acquisition and sale cost them? They kept pieces of it, so I can't tell right away how it worked out.
Google acquired Motorola for its patents as ammunition in a larger war. I agree it supports your main point about acquisitions in general, but I'm not sure it's indicative of what being bought by Google is like in the general case.
You don't spend $12.5 billion on a device maker for patents; You just buy the damn patents. (~_~)
I actually was far more bullish on Android's prospects before given the rapid device growth, the de facto stealing of Symbian's marketshare and the adoption of the platform as a basic and functional OS for most users. However, as a strategy I think this is quite flawed initially.
As a device maker, Motorola Mobility would be a good play for HTC or Samsung. They'd be integrating an established maker with contracts, devices, patents, etc. For the platform maker to outright buy them would immediately put most other makers on guard.
What guarantee do you have that Google won't favor Motorola? How do you know that they will keep things on an equal footing? You don't. Case in point: travel comparison on AdWords. Google has shown their willingness to integrate vertically and throw valued customers under the bus.
In the long run, it makes absolutely zero sense for Google to keep Motorola as "just another device maker" in the Android ecosystem. They most likely will give it lip service for a year, try and fight off some patent suits and then slowly integrate things much more tightly. I think they're betting that they can become another Apple in terms of integration with Android not being overly harmed by other vendors fleeing to Microsoft. It is the logical strategy - the one driven by reality, not some PR spin of being "open".
Google bought Motorola for 12.5 billion and then sold off it's Home division for 2.3 billion. At the time of the purchase, Motorola had 2 billion in cash so in the end, Google probably paid 8 billion ish for Motorola. Considering that in those 1.5 years, Moto and Nokia's values have been decreasing as well, I think they are pretty close in value.
In my opinion, the increase in Google share price really has to do with the Motorola purchase. There is a potential that Motorola phones could some day be just as popular as Samsung or Apple - this a huge add to the share price and Google's revenue and profits. Just take 10% the market cap of Apple and Samsung and add it to Google, you'll see the picture.
True, but Google has a number of unprofitable divisions. Technically, if you look at G+, Maps, and to some extent, Chrome and Android, which are given away for free, if these were separate businesses, they would bleeding money. I guess technically you could look at Chrome like Mozilla and imagine some ongoing deal to be the default search box. YouTube had no ROI for a long time, certainly longer than the 2 years Google gave Motorola.
Motorola was probably going to go bankrupt before Google bought them. Like Apple when it was bleeding money in the 90s, it needed a way to gain time to reinvent itself. Google's purchase probably prevented mass layoffs in the short term, but has Motorola been given enough time to turn itself around? I dunno. We will see what happens shortly after Lenovo takes control.
Given Motorola's history in the technology industry, it's sad to see them go under. Reminds me of Silicon Graphics, the company that basically invented the majority of the fundamental facets of modern computer graphics, gone, while people gleefully play games on their mobile GPUs unaware of where we'd be without them.
Yeah, I'm not sure how straightforward it all was, but according to this article:
> At $12.5B, Motorola is Google’s largest acquisition to date. Google paid $40 / share in cash, but received ~$11 / share in cash and $8 / share in deferred tax assets. Thus the value ascribed to operations + patents was about $21 / share, or $6.3B, reflecting a multiple of ~0.5x sales and 12x EBITDA. Now adjusting this further for the $2.35B total consideration Google is expected to receive for the Motorola Home business, we get a purchase price of just under $4B for Motorola's handset business and patent portfolio (17K patents and 7.5K patent applications).
Do you see how that argument is flawed? Leaders in a market tend to be worth much more and have much higher profits than even the 2nd player in the market, let alone the third or fifth. When you have a small percentage of the market, it's also much more difficult to make something out of it, than it would say for a market leader to go from 30% market share to 50% market share (and billions of dollars more in revenue).
We could repeat the argument for a small social network that has a much lower market value than Facebook per user, and so on.
reply