And if I catch it coming back my way
I'm gonna serve it to you
And that ain't what you want to hear
But that's what I'll do
-- "Seven Nation Army," by The White Stripes
So Google (Nasdaq: GOOG ) just decided to jump into mobility with both feet. Buying Motorola Mobility (NYSE: MMI ) at a 63% premium to recent share prices puts a $12.5 billion price tag on that decision.
This is Google's biggest deal ever, by quite a large margin. Google also has reason to make it happen: Motorola gets a $2.5 billion breakup fee if the deal falls apart. But with $13.1 billion in operating cash flows over the last year, Google can easily repair any damage to its balance sheet.
Why is Big G suddenly so willing to pay big bucks for a smartphone specialist?
- Motorola Mobility's cache of 17,000 patents (and 7,000 more pending) in various niches of mobile communications looks like a tremendous weapon in the escalating patent wars. "Nuke us and we'll fire right back."
- Critics of Google's Android efforts often point out that Apple (Nasdaq: AAPL ) makes money from its hardware, but Google doesn't. This deal changes that equation.
- Buying InterDigital (Nasdaq: IDCC ) would be an obvious patent play, perhaps running into regulatory issues for that very reason. The Motorola deal adds significant new business operations to Google, creating an end-around play to get past the critics.
- HTC and Samsung's mobile divisions would come with all the complications of billion-dollar buyouts across borders and oceans. Motorola is a much simpler option.
- All that cash was burning a hole in Google's pocket, and Larry Page felt obliged to spend it. Nah, just kidding.
If approved, this buyout makes some fundamental changes to the Android ecosystem. Though Google promises time and again that the flourishing partner system will stay intact, Google becomes a direct competitor to its handset partners. On the other hand, the company also gets a whole new level of skin in the mobile game and thus lots more incentive to fight for Android's rights (to paaaaarty).
That second point sets this apart from Cisco Systems' (Nasdaq: CSCO ) ill-fated decision to trample on its reseller partners' toes with an in-house line of server computers. Mountain View ameliorates that potentially fatal mistake by reassuring its slighted sidekicks that big-money assistance in courts and sales channels will keep coming for many years ahead. Cisco did nothing of the sort.
The other Android guys are buying Google's rhetoric so far. "We welcome Google's commitment to defending Android and its partners," says LG CEO Jong-Seok Park. "I welcome Google's commitment to defending Android and its partners," says Sony-Ericsson CEO Bert Nordberg. Does that sound rehearsed to you? Yep, there's a party line.
Will this united front last? That will depend on how well Google walks the walk. If Motorola phones suddenly get superior access to new Android technologies and marketing materials, we could have a mutiny on our hands. And if not, critics will rightly question the value of this $12.5 billion acquisition.
Google has to walk a very fine line here.
The deal is, of course, a bit more complex than a simple patent-portfolio play with a $656 million side of trailing operating cash flows. Besides smartphones, Motorola Mobility is also a giant in set-top boxes for cable providers, giving the Android-based Google TV platform a second wind. Nope, that division did not stay with Motorola Solutions (NYSE: MSI ) in last year's much-covered Mobility spinoff. One has to wonder if the seeds were sown for today's news at that point, or if Google had a say in exactly which assets Motorola moved out.
Furthermore, if this deal attracts antitrust scrutiny as some observers expect, Google could turn the spotlight back on Apple, Research In Motion (Nasdaq: RIMM ) , and others, because those guys don't allow anyone else to take a ride on their software platforms. How could you accuse a handset-making Google of a monopoly without giving iPhones and BlackBerrys the same treatment?
The bottom line
Google is taking financial, regulatory, and partnership risks with this deal. In return, the company could reap benefits in exactly those areas along with diversifying into new offline operations. Investors are somewhat skeptical of the payoff -- share prices are falling by a couple of percent on a generally upbeat market day.
To me, this is a litmus test of Google under old-is-new-again CEO Larry Page. Handled correctly, this looks like a terrific deal that could pay for itself in a few years' time while also reinforcing Android's long-term viability.
A fumble, however, could essentially kill Android. Samsung might scurry back to its Bada platform, HTC could flee to Windows Phone 7, and then Gootorola would become an ironically faithful copy of the fiercely independent iPhone model.
We shall see. I remain a Google shareholder, because Page must be acutely aware of this tremendous test -- and in that case, I like Google's odds. I'd have to revisit this conclusion if the reformed Motorola Mobility starts lashing out at its brothers-in-arms.
That's why Google and Motorola Mobility both have a permanent home on my Foolish watchlist. The best way to keep track of management's fortunes and folly is to keep a close eye on news and analysis, and our watchlist system gives you a super-simple way to do exactly that. Just limber up your clicking finger to get started right now: