Google Inc. (GOOG) agreed to acquire Motorola Mobility Holdings
Inc. (MMI) for about $12.5 billion, a deal that spells the end of
independence for a venerable American company and reshapes the
booming market for smartphones as computing shifts from the desktop
to mobile devices.
The deal gives Google--which has spurred widespread adoption of
its Android mobile operating system by licensing it freely to
mobile phone makers--its own in-house hardware operation,
potentially enabling it to challenge rival Apple Inc. on better
terms but also raising questions for partners like Samsung
Electronics Co. (005930.SE), HTC Corp. (2498.TW) and LG Electronics
Inc. (066570.SE).
It also gives Google ownership of a huge trove of patents that
it will be able to use to defend itself amid an increasing fierce
war over intellectual property among technology companies.
More fundamentally, however, the deal further hardens the battle
lines in the mobile business. Apple already operates what some call
a "walled garden" of operating software, mobile applications and
devices like the iPhone and iPad. Earlier this year, Microsoft
Corp. cut an extensive deal with Nokia Corp. that will see the
world's top mobile phone maker adopt its Windows mobile operating
system for smartphones.
Now, Google too will be closely aligning hardware and
software.
Google executives said on a conference call that the acquisition
will help protect the Android operating system from patent threats.
The company also offered assurance the deal won't affect its
relationships with handset-making partners that use Android.
"With mobility continuing to take center stage, the combination
with Motorola Mobility is an extremely important event in Google's
evolution," Google Chief Executive Larry Page said.
He added that Motorola Mobility has an "exciting product
roadmap" and is poised for "tremendous" growth. In addition, its
"strong" patent portfolio--which Motorola Mobility's Jha pegged at
17,000 patents and over 7,500 applications pending--should help
protect Android from competitive threats by Microsoft, Apple and
other companies.
Motorola Mobility shares soared 57% to $38.41, approaching the
offer price of $40 a share, which is a 63% premium to its Friday
close. Google shares fell 1% to $557.99.
Google expects to complete the transaction by early 2012, and
it's been approved by the boards of both companies. The deal has a
reverse 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 Chief Financial Officer Patrick Pichette said the
acquisition should "mildly" add to earnings, excluding amortization
of intangibles, once the deal closes. He added Google still has
"plenty of financial flexibility to pursue substantial future
opportunities," which Google Chief Legal Officer David Drummond
said could include the purchase of more patents.
"We've been saying for some time that we intend to protect the
Android ecosystem," Drummond said. "It's under threat from some
companies."
Before the deal, Google was considered to have 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.
"I spoke yetserday to, I think it was the top five Android
licensees, and they all showed very enthusiastic support for the
deal," said Andy Rubin, Google's senior vice president of mobile at
Google.
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.
HTC announced support for Google's acquisition, saying it will
benefit from the promotion of Android phones and that its
partnership will not be affected by the deal. Samsung and LG
declined to provide an immediate comment.
The deal also could be seen as mixed news for Research in Motion
Ltd. (RIMM, RIM.T) and Nokia Corp. (NOK, NOK1V.HE). While a
Google-Motorola combination could be a bigger threat to the
struggling smartphone makers, the deal also lifts the valuation on
the patents held by RIM and Nokia. Also, the two--which don't make
Android phones--are immune to any possible Android pullback by
Google.
RIM shares rose 4.6%, while Nokia added 12%.
Gartner analyst Carolina Milanesi said the deal could be more of
an issue for Google in the tablet market, where Android has
struggled to compete with the Apple iPad. "With Windows 8 coming
next year and H-P talking about possibly licensing WebOS, there are
more possible alternatives in the tablet space," she said. "In the
smartphone space, Android is too strong of a force to do
without."
Meanwhile, Google had preliminary acquisition discussions with
wireless technology developer and licenser InterDigital Inc. (IDCC)
after missing out on Nortel. InterDigital shares plunged 16% to
$63.62.
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.
Icahn said in a statement Monday, "this is a great outcome for
all shareholders of Motorola Mobility, especially in light of
today's markets."
Motorola was founded in 1928 and in 1983 unveiled the world's
first commercial portable cell phone, according to its website. The
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.
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.
-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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