Google Dumps Motorola, Samsung Smiles

At the time of the acquisition, many analysts stated that the only reason Google was purchasing Motorola was for the company’s patents, to act as a so called nuclear deterrent against Apple

Jan 30, 2014 at 4:00PM

In an about-face, Google (NASDAQ:GOOGL) sold its Motorola unit to Chinese electronics giant Lenovo for $2.9 billion.

Breaking it down
Investors may wonder why Google purchased Motorola in the first place. The price paid was $12.5 billion in 2011. Subtracting the sale of the set-top box division for $2.4 billion, the $3 billion in cash Motorola came with, $2.4 billion in deferred tax assets, and now this sale, the total is a loss of $1.7 billion. Toss in the $2 billion in operating losses Motorola had under Google, and the grand total is a $3.7 billion loss for Google shareholders.

At the time of the acquisition, many analysts stated that the only reason Google was purchasing Motorola was for the company's patents, to act as a so-called nuclear deterrent against Apple and others looking to thwart Android's progress. CEO Larry Page insisted that Google was excited about the products in Motorola's pipeline, and the company would stay the course with the unit.

Larry Page, publicly explaining the sale, stated:

The smartphone market is super competitive, and to thrive it helps to be all-in when it comes to making mobile devices. It's why we believe that Motorola will be better served by Lenovo -- which has a rapidly growing smartphone business and is the largest, fastest-growing) PC manufacturer in the world.

Flawed logic about the sale
According to Forbes, which states (via some very fuzzy math) that Google is actually profiting "billions" from its acquisition of Motorola because it is retaining the company's patents after the sale, which, at the time of the original purchase, were valued at $5.5 billion dollars.

However, the value of these patents remains unproven, and Google has continued to lose to Apple in court. While the patents certainly have value, there is little evidence they are worth the original price paid.

Samsung
Google's most important hardware partner, Samsung (NASDAQOTH:SSNLF), made clear that it was uncomfortable competing directly with a Google-controlled Motorola, and balked at the notion that Google might give its own subsidiary an unfair competitive advantage. Interestingly, only days ago, Google entered into a broad patent cross-licensing with Samsung. The sale of Motorola was obviously precipitated by two major factors:

  • Sales of the MotoX phone have not met Google's expectations, and the unit is bleeding red ink.
  • Because of poor sales at Motorola, Google has placed a higher value on its relationship with Samsung.
Driverless cars
It might be odd that I'd bring this topic up, but this is a very important project for Google that has the potential to add trillions of dollars of value to the world. I believed that Motorola and their hardware capabilities might enable Google to do more in this arena than just produce software for the cars. With this sale, it appears Google will be content to merely be the brains behind the machines.

Takeaway
Going forward, it will be difficult to take Larry Page's statements at face value. It might very well be the case that Google didn't see the results with Motorola that it was expecting, and wisely changed course. But, it's hard ignore the possibility that Page's claim that Motorola would remain the company's hardware maker was truly the smokescreen analysts originally contended it to be.

In hindsight, the Motorola deal seems to have been all about the patents, which are apparently worth far less than what was shelled out for them.

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Margie Nemcick-Cruz owns shares of Google. The Motley Fool recommends Google. The Motley Fool owns shares of Google. 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.

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