Google is offloading its Motorola unit to hardware maker Lenovo for $2.91 billion. The Chinese company first caught everyone’s attention when it bought IBM’s (IBM - Analyst Report) Thinkpad business several years ago. It is now buying IBM’s server business and Google’s Motorola handset business for a full-fledged entry into all segments of the computing/consumer market. Google shares rose 2.2% in response to the news.
Lenovo Gets a Good Deal
This is a big deal for Lenovo, spurring its aspirations in non-Asian markets. Motorola is tied up with more than 50 wireless carriers all over the world where it has been operating for many years. So this is an immediate distribution network for the company.
Lenovo has also been more of a local player, primarily focused on computing products, building its brand on technology that it acquired from IBM. Its cell phone offering is a fledgling effort that will greatly gain from the knowledge, experience and brand name that Motorola brings. Lenovo plans to use its own brand where it is recognized and the Motorola brand where it is more recognized.
Lenovo is also getting 2,000 patents, as well as the promise to license several others from Google. It will also be using Google’s Android OS, which is the leading global OS. Scaling operations to spread globally is also expected to help on the cost side.
What’s In It for Google?
Google paid $12.5 billion for Motorola and it is getting just $2.91 billion. But consider this- it also acquired around $3.2 billion of cash nd $2.4 billion in deferred tax assets, received a consideration of $2.35 billion when it sold off the STB business and another $75 million for the sale of some facilities to Flextronics.
Even considering that it absorbed roughly $2 billion of losses, the net outflow comes to $6.48 billion. The purchase consideration it’s getting from Lenovo is $2.91 billion, meaning that the cost of the 15,000 patents it is retaining is around $3.57 billion. When Google acquired Motorola, the 17,000 patents it acquired were valued at around $5.5 billion. So not such a bad deal after all.
Google also gains by building Lenovo as a strong competitor to Samsung, which has been throwing its weight around lately. As Samsung grew in size as the most effective Android partner, it started raising issues with respect to revenue sharing. It also developed a competing OS called Tizen, which could potentially replace Android in future Samsung phones.
Samsung’s competitive tactics have also driven a wedge between Google and long-time partner Apple (AAPL - Analyst Report) . The other obvious advantage is that without a hardware business, Google’s hardware partners will no longer perceive it as a direct competitor.
Google has always been more of a software company. This is its core competence and this is what it excels in. Therefore, without the distraction of a hardware business and the competitive nature of the market, Google will be able to better focus on its strengths. The fact that this business generates higher margins is an added positive.
The deal could attract some government scrutiny, but is likely to go through.
Google’s shares currently carry a Zacks Rank #3 (Hold). A safer bet (if you are looking for search exposure) would be Baidu (BIDU - Snapshot Report) , which carries a Zacks Rank #2 (Buy).