Have you ever heard the story of a man who was hitting his hand with a hammer? When his friend asked why he was doing something so ridiculous, he replied "because it feels so good when I stop." This may be how shareholders will feel when Google's (NASDAQ:GOOGL) sale of Motorola is finalized. Motorola was a disastrous acquisition, and the share price is likely to go up as a result of the sale.
Google recently announced that it is selling Motorola Mobility for $2.91 billion, a fraction of the $12.5 billion paid when the company was acquired less than 18 months ago according to company press releases.Essentially, Google bought a patent portfolio and stripped out the operating components. Just how much shareholder value did this escapade destroy?
Motorola contributed $865 million
The loss associated with the purchase and sale of Motorola is really closer to $6.3 billion, rather than the $9.1 billion that the headlines would make you believe. When Google announced the acquisition of Motorola in August 2011, the target had net cash of $865 million. Other numbers seen in the press don't include the liabilities to Motorola's distribution channel, as this isn't a discretionary expense. The channel always gets paid. This brings the cost down to $11.6 billion.
Cablebox business added $2.9 billion
Google restructured Motorola to keep only the handset business and patent portfolio by selling the Home business (cable boxes) to Arris for $2.4 billion in cash and stock. By adding back the sale price of the handset business for $2.9 billion, the total cost of the patent portfolio was $6.3 billion.
Operating losses consumed $2.4 billion
This seems like a high price tag for a series of patents, but this doesn't include the operating losses that Google incurred during the time that it held Motorola. Motorola never contributed operating income to Google. In fact, it incurred another $2.4 billion in losses over the last seven quarters. This brings the price tag to $8.7 billion for those patents, which, after taxes, amount to $18.50 in profits per share.
This is outrageous and infuriating. This is going to make the share price go up. On Wall Street, the absence of pain causes earnings to grow faster, and that's what makes share prices appreciate: unexpected accelerations in profit growth.
Looking at the last seven quarters of Google's operating profit, both with Motorola included and backed out, its easy to see the business was losing money, but that loss was accelerating each quarter. When this is off the books, Google shareholders will be in for a big treat: accelerating earnings growth.
Divesting handsets adds over a buck a quarter to EPS
Even though Google destroyed value for seven quarters and cost shareholders $8.7 billion dollars, the share price will benefit from the lack of earnings drag once Motorola is removed. Excluding the $507 million loss in the most recent quarter, profits would have been $1.22 per share higher at Google's blended tax rate.
While shareholders should be upset about the misuse of capital, the bulls' cheers over stronger than expected earnings will drown out the bears' grumbling. The strength of Google's core business masked how poorly this acquisition has performed and when the deal closes with Lenovo we are likely to see a one time acceleration in earnings growth if management lets the added profit fall to the bottom line rather than spend it on pet projects.