Was Motorola Mobility Cheap?

John Keating isn't content with $12.5 billion. Don't know him? You will soon if, like Keating, you own shares of Motorola Mobility Holdings (NYSE: MMI  ) .

He's filed a complaint in a Cook County, Ill., circuit court that claims Google's (Nasdaq: GOOG  ) acquisition offer undervalues the company. Keating's law firm, Lasky & Rifkind Ltd., according to court documents, is seeking class action status for the suit, Bloomberg reports.

"Motorola has experienced an economic resurgence since separating into two separate companies ... The Android smartphone technology it relies on continues to gain ground on Apple's (Nasdaq: AAPL  ) iPhone," Bloomberg quotes Keating as saying in the complaint.

Never mind that Apple blew away all estimates for second-quarter iPhone sales and is now the world's leading seller of smartphone handsets. (Whoops! Stupid facts.)

Far as I can tell, Keating hasn't specified an appropriate valuation for Motorola Mobility. But that's understandable. Not only would it be poor negotiating strategy -- i.e., never be first to name a price -- but there's simply no math that's going to make Mr. Moto's smartphone division look cheap at current prices. The whole idea is worthy of a spit-take.

Just look at the numbers. According to Yahoo! Finance, Motorola Mobility trades for a massive premium to the long-term earnings growth analysts expect, resulting in a bubbly and probably unsustainable 4.54 PEG ratio at current prices.

And please, let's not talk about patents, OK? Motorola Mobility's tangible book value stood at $10.38 a share as of July 2. Today's investors (e.g., Google) is paying roughly $27 more a share -- or a little more than $8 billion -- for future growth and intangibles, such as the company's 17,000 assigned and 7,000 pending patents.

I'd have a hard time paying $8 billion for IBM's (NYSE: IBM  ) patents, a business that generates more than $1 billion annually in royalties. Granted, we don't know the precise math here, but I'd bet that Google is paying geometrically more than eight times annual royalty revenue for Moto's patent portfolio. "Generous" is too kind a word for the terms CEO Larry Page agreed to, especially if he makes good on promises to keep Android an open platform.

Lawyers will have to decide the fate of this suit. But as far as the underlying claim goes -- that Motorola Mobility is still cheap -- it seems to me that neither numbers nor common sense are on Mr. Keating's side. Do you agree? Disagree? You can leave a comment to tell us your thoughts about the acquisition bid and add Motorola Mobility to your watchlist for up-to-date analysis on the stock as soon as it's published.

Fool contributor Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team. He owned shares of Apple, Google, and IBM at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Google+ or Twitter, where he goes by @milehighfool. You can also get his insights delivered directly to your RSS reader.

The Motley Fool owns shares of Google, International Business Machines, and Apple. Motley Fool newsletter services have recommended buying shares of Google and Apple. Motley Fool newsletter services have recommended creating a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (4) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 19, 2011, at 11:25 AM, ConstableOdo wrote:

    Keating's an idiot and he'd better not ruin it for Motorola shareholders. Motorola (MMI) would never see $40 a share if not for Google's offer. Those Motorola Android smartphones were just bleeding the company dry. I'll gladly take the $40 and be on my way.

  • Report this Comment On August 19, 2011, at 12:25 PM, melegross wrote:

    I agree with ConstableOdo, and was going to say the same thing. Moto was likely overpriced at $12.5 billion. Usually, when a company is doing well, a 30% premium or so over the current market value is indicated. This is going for a 60% leap. I thought Google overpaid by $4 billion, if anything.

  • Report this Comment On August 19, 2011, at 3:28 PM, Omadon wrote:

    Well, Google probably knows more then us, and they have intentions in more then just smart phone market, and patents. Home business, cable stuff, set top boxes, modems, transmission side, content (commercial) insertion. They can create totally connected home, if you remember that term from couple a years ago. Imagine that what ever you turn in your home, including cell phone and that TV on your fridge ;) , you see "powered by Google" logo :)

  • Report this Comment On August 19, 2011, at 4:42 PM, rfaramir wrote:

    +1 rec for the "Mr. Moto" movie reference. That was a fun series!

Add your comment.

DocumentId: 1541181, ~/Articles/ArticleHandler.aspx, 4/18/2014 10:56:38 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement