No matter how you look at it, twelve and a half billion US dollars is a lot of money. Sure, in the billionaire playground of Silicon Valley that’s merely a medium sized company, but in the real world it’s the GDP of Botswana. So when Google splashed out that amount to buy Motorola Mobility, it raised some eyebrows and plenty more hackles.
Firstly, it’s Google’s biggest acquisition to date by a factor of four. It paid $3.1-billion for DoubleClick, an online advertising firm, in 2007 — a deal that was undeniably a neater fit than Motorola. Size is always a factor in acquisitions. It’s much easier to integrate a few hundred new employees than over 19 000. Google says it plans to run Motorola as a “separate business” but a deal this size will always be a distraction.
Secondly, Google’s core business is online software and services — it has no experience running a consumer electronics manufacturer. The cellphone market is a relentless and savage terrain — just ask Nokia. Not exactly a friendly training ground for an inexperienced owner.
Thirdly, Motorola is struggling. It has been running at a considerable loss for the better part of a decade. Its share of the cellphone market — now less than 3% — is a mere blip in Apple and Samsung’s rear view mirrors.
That makes many analysts question the real motive for the acquisition. As Larry Page, Google’s current CEO, admitted in the announcement of the deal, “our acquisition of Motorola will increase competition by strengthening Google’s patent portfolio”.
The second part of that sentence is an understatement. As one of the oldest cellphone makers in the world, Motorola holds over 17 500 patents (and more than 24 000 if you count their pending applications). The vast majority of these are for cellphone technologies — some of them seminal to the industry.
Considering a consortium headed by Apple and Microsoft recently paid $4.45-billion for 6 000 patents once owned by Nortel, the Motorola deal might sound like a bargain. But patents are not uniformly valuable. Motorola’s patent filing heyday was back in the Nineties. Since then it has lost much of its momentum. Some analysts question the real value of the stash, beyond the impressive sounding numbers.
But why the sudden rush to snap up patents by the thousand? They have become the weapons of choice in the global battle for the world’s most prized technology market: mobile computing and telephony.
On August 9, for instance, Apple obtained an injunction to stop Samsung from distributing it’s new tablet computer in Europe. The reason? It infringed on Apple’s patents on the phenomenally popular iPad tablet. The injunction has since been overturned, but it gives you an idea of the stakes involved in this global poker game.
This makes me doubt the sincerity of the first part of Page’s sentence. He says the acquisition will “increase competition”. Considering Google’s recent public spat with Microsoft and Apple over the Nortel deal, I say “poppycock”.
Page and his legal eagles realised they needed an arsenal to take on mean old Apple and Microsoft, and so they have gone out and found one. That may be “fair” but it won’t increase competition. It will simply increase the viciousness of the legal battles between the tech behemoths. That’s not the same thing at all.
So, what’s the problem? It’s not like Google can’t afford it. It is currently sitting on close to $40-billion in cash and cash equivalents. It made $8.5-billion in profit last year. In that context $12.5-billion doesn’t seem like that much.
But the question, from an investor’s point of view, is not whether Google can afford it, but whether it’s the best use of its cash. The markets have punished Google since the deal. It’s shares are down over 6% and Standard & Poor (always keen to poop the party) has suggested that people sell their Google stock now.
I think Google is still a good long-term bet. Its grip on the search market is still strong, and its Android operating system is eating up market share like Pacman. Microsoft, who used to scoff that Google was a “one trick pony”, is now spending billions in an attempt to catch it in both search and mobile.
But investors are right to be worried. Google’s stellar revenue growth seems to be a thing of the past. Unless it’s willing to use its cash to actually boost growth rather than squabble with its classmates, it needs to consider buying back shares or returning a fat dividend. Anything else is going to make its shareholders grumpier and the markets twitchier. But, hey, $27-billion in spare cash is a pretty nice problem to have.