MMI Marcus and Millichap Inc

By the time you read this, you will undoubtedly have heard the big investment news of the day: Google's (GOOG) $12.5 billion all-cash acquisition of Motorola Mobility Holdings (MMI). Agreeing to a take-out share price of $40, the deal is a 63% premium over MMI's Friday close, and about $1 billion in market cap over its all-time high.

This is a great lesson in why we pay insane triple-digit P/E multiples for companies -- or, in the case of MMI, big "P" for companies with no "E" at all.

What I mean is that we all know that even a great business concept or growth story can become a bomb of an investment. But even when earnings visibility is scarce, you never know when some whale will sweep in and gobble up the asset for some unseen potential.

Actually, in MMI's case, lots of people probably saw the potential of this deal because of the technology and intellectual property "connections" the two companies shared. It's just that if you were an MMI investor, you had no real guarantee Google would finally step up.

GOOG Builds a Moat

Here's what I wrote about MMI CEO Sanjay Jha in June...

Jha thinks the phone will always be the ultimate device for consumers and business people because it is the one we carry with us at all times. It is the "digital hub" of people's lives as he calls it. And therefore he believes that the biggest opportunities in his industry are the "convergent capabilities" of computing and communications in a single, handheld device.

Google management probably saw the potential of someone else scooping up this key partner at much higher prices, and that possibility posed a real threat to their mobile strategy.

Why? Because MMI is all about intellectual property that gives Google a fighting chance to compete with Apple (AAPL). With over 25,000 technology patents in the MMI vault (over 17k granted, 7k pending), Google says the acquisition will enable them to "supercharge the Android ecosystem and will enhance competition in mobile computing."

Protecting a Big Bet

Peter Kafka, writing for Dow Jones website AllThingsD.com, gave us some excellent play-by-play of the conference call this morning. I share some highlights here because they give great flavor to the "star wars" world of mobile-comm gadget competition.

Larry Page, Google CEO, said that MMI chief Jha "made a big bet" by using Android as the sole MMI development platform a few years ago. Page mentioned the MMI patent portfolio, "which will help protect" Google from their big mobile competitors, including Microsoft (MSFT).

Page and Android division head Andy Rubin fielded several questions about the business dynamics of a platform provider acquiring a device manufacturing partner. They both said that it changes nothing, noting that MMI would be run as a separate business and that it would gain no special advantages over other Android partners like Samsung.

Rubin, who Page reminded everyone was the inspiration in 2005 behind the open-source platform for mobile devices, said this is about "protecting the ecosystem, and extending it as well."

Asked about FTC hurdles, foreign regulators, and the perception of anti-trust if no other bidders were considered, Google Corporate Development head David Drummond acknowledged the need for regulatory approval in Europe as well as the US.

"We believe this is a pro-competitive transaction."

Kafka summed up Drummond's additional comments thus: Android has added competition, user choice, and so "protecting that ecosystem" is pro-consumer "almost by definition."

Scale vs. Innovation

MMI CEO Jha knows a thing or three about competition in the mobile-comm wars. In June, I wrote "Apple Empire in Danger?" after I saw an interview with Jha talking about "internal" threats to the dominator of handset magic.

Here's how I described his views then...

"What are Apple's vulnerabilities?" This was the question posed to Sanjay Jha, CEO of Motorola Mobility this week by Fortune's Geoff Colvin, Senior Editor-At-Large, on CNNMoney. Jha first praised and admired the success of Apple in delivering world-class products. Then he spoke broadly about the challenges of any giant tech success, saying that "scale and innovation very often don't mix."

He explained this decline-and-fall thesis by focusing on what tends to happen when a company is faced with defending its large market share and its competitive advantages. "Defensive actions very often set in and middle management begins to drive the culture and strategy of a company. Not speaking about Apple in particular, but with the scale that comes with that level of success, very often is in itself the beginning of a decline sometimes."

Jha was diplomatic and enlightening in his analysis. And maybe curiously foreshadowing of his position versus Apple. Now, he's tied to the other monster of innovation.

And I bet, Sanjay Jha has a new bet now: that he can continue to innovate despite Google's size and money.

Some eyes may be on Research In Motion (RIMM) now as a possible acquisition target with its shadow-of-former-self $13 billion market cap.

I'm more interested to see how the empire (aka, Apple) strikes back.

Kevin Cook is a Senior Stock Strategist for Zacks.com
 
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