Google Inc. has finally closed its acquisition of cell phone maker Motorola Mobility Holdings, Inc. (MMI - Snapshot Report) for $12.5 billion ($40 a share).
The merger was approved by regulators in China on the condition that Google’s Android software would remain free for other hardware makers for at least five years. This deal is the biggest in Google’s 13-year history and among the 136 acquisitions it has made since it went public in 2004, which have cost the company $9.1 billion in total.
Google has stated that Motorola would continue to be run as a separate unit, with its phones based on the Android OS. Google’s Dennis Woodside would be the new CEO of the business.
We do not think that Google would be interested in going for a software-hardware integrated approach, since this would likely pull down its margins. Instead, Google could sell or spin off the hardware business some time in the future. A few sources stated that last month Google was heard talking to Chinese giant Huawei about selling the handset division, which clearly implies that the acquisition was made purely to shore up Android’s patent portfolio.
Given Motorola’s 17,000 existing and 7,500 pending patents, we believe the deal will prop up Google’s patent portfolio in the mobile space, which has lagged peers such as Apple, Microsoft Corp. (MSFT - Analyst Report) and other technology giants. We think this would lend stability to the Android ecosystem and defend phone makers that use Android against litigation.
Google’s immediate next steps are not known, but we expect certain layoffs or restructuring with the Motorola deal.
Google shares therefore carry a Zacks #3 Rank, implying a Hold rating for the near term.