Google’s acquisition of Motorola Mobility — a bad move?

Search engine giant Google recently announced it is purchasing Motorola Mobility Holdings, Inc., the former Mobile Devices Division of Motorola, for $12.5 billion. According to Google, the move was meant to protect its Android operating software from intellectual property lawsuits.

But was it a good move?

From domination to spinoff

Motorola used to be a powerhouse in the mobile phone market. During the ’90s, it commanded a 30%+ market share around the world before Nokia overtook the lead through the latter’s user-friendly phones and affordable prices.

Motorola staged a comeback in early 2000 with its RAZR line, the first of ultra-thin and stylish-looking niche of cellphones. However, they failed to come up with an immediate follow-up, causing a continuous decline in their market share. From being #2 to Nokia with an 18% global market share in 2007, it has now dropped to #7 in 2010, with a small 2.4% market share.

In January 2011, Motorola spun off its Mobile Devices division and became a separate entity known as Motorola Mobility Holdings.

What is there to gain by Google from the acquisition?

Google believes the purchase will give them access to a horde of patents related to mobile phone technology that can help protect them from a rising number of intellectual property lawsuits. In the previous months, iPhone maker Apple has targeted Android phone manufacturers such as HTC and Samsung and has attempted to block the sale of their phones that supposedly infringe on Apple’s patents.

Google in a losing position

But is the Motorola acquisition meant for Google to support these partner phone brands that adopted the Android software or is it meant to protect Google when they launch their own line of mobile phones?

Either way, it looks like Google is in a losing position.

Even if Google joins the patent dispute frenzy in support of its partners, partner brands such as Samsung and HTC would ultimately feel betrayed now that Google is poised to launch its own line of Android phones. Note that Google’s Android technology took off because HTC, Samsung and other partners chose to adopt the software on their phones. How would they feel if that the maker of the software is now also making a phone that would compete with theirs?

HTC and Samsung aside, there are emerging concerns that Google would find it difficult to compete in the mobile handset market. In the first place, hardware has never been Google’s core business. Cellphone manufacturing involves issues in hardware design, production, logistics, and telecom partnership that Google does not really have expertise in. And Motorola Mobility doesn’t either, because if they do then they would still be a leading player in the market.

S&P on Google stock: Sell

This concern is what prompted credit rating agency Standard & Poor’s (S&P) to downgrade Google’s stock. On August 16, one day after Google announced its acquisition of Motorola Mobility, S&P issued a report significantly cutting its target price for the shares of Google.

S&P wrote that the acquisition poses “greater risk to the company and stock” and they were not sure if Motorola Mobility’s “extensive and valuable patent portfolio” could protect Google’s Android operating system from intellectual property disputes.

The same S&P report made a Sell recommendation on the Google stock, with the target price being drastically reduced from $700 to $500 per share.

On August 17 following the acquisition announcement, Google’s price declined 3.3% to $539, while Motorola Mobility also fell 0.3% to $38.02.

Google has had a history of winners and losers in its previous acquisitions. Whether its purchase of Motorola Mobility would end up as a triumph or failure remains to be seen.

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