UPDATE: Google Agrees To Buy Motorola Mobility For $12.5 Billion

Google Inc. (GOOG) agreed to acquire Motorola Mobility Holdings Inc. (MMI) for about $12.5 billion, giving the developer of the Android mobile operating system its own handset maker and some key patent protection.

The deal would help Google compete more directly with Apple Inc. (AAPL), while stepping up the pressure on Research in Motion Ltd. (RIMM, RIM.T) and Nokia Corp. (NOK, NOK1V.HE). Google also gets access to Motorola's patent trove at a time of increasing demand for intellectual property involving mobile devices.

Meanwhile, the acquisition makes rivals out of some Google partners that license its Android operating system, raising questions about the way Google will operate that business.

Motorola Mobility shares soared 59% to $38.80 premarket, approaching the offer price of $40 a share, which is a 63% premium to its Friday close. Google shares were down 2.8% to $547.80.

Google expects to complete the transaction by early 2012, and it's been approved by the boards of both companies. The deal has a breakup fee of $2.5 billion in cash, according to The Wall Street Journal. The hefty amount may indicate some nervousness about the deal's regulatory prospects as Google has raised antitrust concerns with the Department of Justice.

Google, which owns the fast-growing Android operating system used in millions of mobile phones, has a thin portfolio of wireless and telecommunications patents.

It recently lost the bidding for Nortel Networks Corp.'s (NRTLQ) patent trove to a consortium of tech heavyweights such as Apple Inc. (AAPL) and Microsoft Corp. (MSFT). Meanwhile, Google and Microsoft have engaged in a war of words over their recent maneuvers in intellectual property auctions, underlining the heated tone of the market for such assets.

"The big thing it plugs for Google is: Google's patent portfolio is only a few thousand, and they have been the target of a significant amount of patent litigation," Evercore Partners analyst Alkesh Shah said. "Motorola's patent portfolio provides a very strong defense against all this litigation."

Google will run Motorola Mobility as a separate business that will remain a licensee of Android. It was not clear how the deal will affect Google's relationship with other Android partners, specifically HTC Corp. (2498.TW), LG Electronics Inc. (066570.SE) and Samsung Electronics Co. (005930.SE). In its press release, Google said things wouldn't be different.

"Our vision for Android is unchanged, and Google remains firmly committed to Android as an open platform and a vibrant open source community," said Andy Rubin, Google's senior vice president of mobile at Google. "We will continue to work with all of our valued Android partners to develop and distribute innovative Android-powered devices."

Others, though were more skeptical. "I think this is their early attempt to replicate Apple's business model," Morgan Keegan analyst Tavis McCourt said on CNBC.

Increased sales of devices running the free Android software have given Taiwan's HTC and South Korea's Samsung a shot in the arm after losing market share to Apple's iPhone handset. All three manufacturers, including LG, have said this year they will be boosting the output of Android-based devices.

Samsung and LG declined to provide an immediate comment; HTC said it will make a statement shortly.

Meanwhile, Google had preliminary acquisition discussions with wireless technology developer and licenser InterDigital Inc. (IDCC) after missing out on Nortel. InterDigital shares plunged 23% to $58.60 in recent premarket trading.

Most of the Motorola's revenue comes from smartphones, and the company has been working to diversify its customer base to defend against the potential loss of Deutsche Telekom AG's (DTE.XE) T-Mobile USA, a key customer.

Activist investor Carl Icahn, who is the company's largest shareholder, had been pushing for Motorola to sell its patents, a move he has argued could raise billions of dollars. Some analysts had said the deal could hobble Motorola, which relies on intellectual property to compete.

The smartphone and set-top box company split with its sister Motorola Solutions Inc. (MSI), which is focused on business and networking operations, at the beginning of the year. The separation made Motorola Mobility nimbler and more focused on its core operations, but it faces a highly competitive smartphone market, including a persistent threat from Apple Inc.'s (AAPL) iPhone.

Last month, Motorola reported a 28% rise in second-quarter revenue, thanks to strong tablet sales, but the device maker provided weak guidance for the current quarter because of delays in launching speedier 4G devices.

Meanwhile, Google's second-quarter earnings rose 36% on record revenue as the Internet giant experienced strength in its core search business and gained traction with its newer operations.

-By Matt Jarzemsky, Dow Jones Newswires; 212-416-2240; matthew.jarzemsky@dowjones.com

--Melodie Warner and Yun-Hee Kim contributed to this report

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