The rumors were true! Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) subsidiary Google is essentially acqui-hiring a large number of employees from Taiwanese smartphone maker HTC. The two companies announced the $1.1 billion deal late last night, whereby roughly 2,000 HTC employees will join Google and the search giant will also obtain a non-exclusive license to HTC's patent portfolio. That's quite a price to pay, valuing each employee at around $550,000 on average. It also represents nearly 20% of HTC's head count, which totaled roughly 10,600 employees at the end of the first quarter.
Many of these engineers had already been working with Google on its Pixel phone, as HTC is the contract manufacturer for that device. The two companies have a long history of collaborating on Android devices, including the very first Android phone ever as well as Nexus phones and tablets. Google is not getting any part of HTC's manufacturing operations or virtual reality (VR) team. HTC Chairwoman and CEO Cher Wang said the deal would "supercharge" Google's hardware business, somehow while "ensuring continued innovation within our HTC smartphone and VIVE virtual reality businesses." It's kind of hard to be innovative when you sell off your best and brightest.
A small price to pay
While $1.1 billion is a bit of a higher price tag than rumored, Google is getting a lot more engineers than previously speculated, and it's still far less than the $12.4 billion that Google paid for Motorola Mobility half a decade ago. Google hardware chief Rick Osterloh, who incidentally joined Google from Motorola last year, also offered some commentary in an official blog post, saying all of the engineers who worked on Pixel will be able to accomplish more as one team. Osterloh makes it clear: Google is getting deeper into hardware for the long haul and its hardware business is still in the "early days."
Once the deal closes, which is expected in early 2018, Google's smartphone strategy will be much more closely aligned with Apple's (NASDAQ:AAPL) as the search giant embraces vertical integration and delves deeper into smartphone design while continuing to outsource production to contract manufacturers. Paying $1.1 billion to quickly bolster its smartphone hardware team is a smart move, since it could easily otherwise take years to recruit and assemble a team like this. With as fast as the smartphone market moves, saving that time is crucial.
The Apple way
This deal is vastly different from the Googorola deal. Motorola initially rose to prominence decades ago as a manufacturer, and was one of the last remaining smartphone companies that actually manufactured its own products -- in the U.S., no less -- before slowly stepping away from manufacturing operations. Motorola closed its last U.S. assembly plant in 2014 (where the Moto X was made to order), just a few months after Google sold Motorola to Lenovo.
Generally speaking, manufacturing is not a capital-efficient business to be in, characterized by slim margins and significant overhead and operating expenses. It never made sense for Google to be involved in production since it has no organic experience doing so. There are numerous reasons why the Motorola deal was misguided, both financial and strategic, but none of those criticisms apply to the HTC deal. In contrast, the HTC agreement makes an awful lot of sense. Google can focus on design and deeper integration with hardware, while still offloading the financially unattractive aspects of manufacturing, in order to push Android forward as a platform.
The only bad news? There's not a cute portmanteau to remember the HTC deal by.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Evan Niu, CFA owns shares of Apple. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and Apple. The Motley Fool has a disclosure policy.