Google Boggled by S&P Rating

Ratings agency Standard & Poor's, a unit of McGraw-Hill (NYSE: MHP  ) , has once again thrust itself into the spotlight with its downgrade of Google (Nasdaq: GOOG  ) .

Just seven business days after S&P downgraded the credit rating of the United States because of the contentious debt-ceiling debate, it reversed its "buy" rating of Google to "sell" because of Google's decision to buy Motorola Mobility (NYSE: MMI  ) for $12.5 billion.

Patents pending
Many observers believe that Google's main reason for buying Motorola is to acquire its treasure trove of patents. Patent hording has become a big -- and controversial -- topic lately, and Google may have purchased Motorola mainly as patent-lawsuit protection.

RPX (Nasdaq: RPXC  ) , for example, is a company that provides what it calls "patent risk solutions." The company scoops up patents and then charges companies a fee to avoid litigation. If a company can afford the fees, it's just one cost of doing business. To a company that can't afford them, it could mean the cost of going out of business.

RPX's website informs us: "Patent litigation used to be a form of legal redress. Today it is a business model." Some people may call that a form of insurance; others may call it a form of racketeering.

A recent "This American Life" podcast chronicles the effects that so-called "patent trolls" can have on tech companies -- from the smallest to the largest.

Meanwhile, back at the ranch …
Google had already failed in its bid for Nortel Networks' wireless patents earlier this year, and if the rumors were true that Microsoft (Nasdaq: MSFT  ) was also in talks with Motorola, then Google may have felt that it had to make a preemptive, if somewhat desperate , strike.

The sky is not falling yet, and I think it's a bit early for S&P to be slamming Google; that rating reversal is a bit drastic. Why didn't S&P just issue a "hold" recommendation and take a wait-and-see posture? Does it truly believe that acquiring Motorola will send Google to its doom? Or has S&P just gotten used to the limelight and is not ready to give it up?

Follow Google and Motorola by putting them in your Watchlist.

Fool contributor Dan Radovsky has no financial interest in the companies mentioned. The Motley Fool owns shares of Microsoft and Google. Motley Fool newsletter services have recommended buying shares of Microsoft and Google and creating a bull call spread position in Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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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  • Report this Comment On August 18, 2011, at 12:03 AM, InvestWhatWorks wrote:

    If you think about it in a simplistic way, it is kind of hilarious. All Google did was follow S&P's recommendation. Before Google announced that the acquisition, S&P actually had a buy rating on Motorola Mobility. So Google is essentially being punished by the S&P for doing what the S&P recommended.

    Again, that's a simplistic way of looking at it, but still... lol. S&P is a joke, so you just got to find the humor in the situation.

  • Report this Comment On August 18, 2011, at 10:00 AM, mdtopper wrote:

    Not simplistic at all. That's exactly what happened.

  • Report this Comment On August 18, 2011, at 11:59 AM, tallman68 wrote:

    To paraphrase Jon Stewart "This is basically a company whose name means average & below average."

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