Google Inc. (GOOG - Free Report) recently announced that it will lay off 4,000 of the 20,000-person workforce that it inherited from Motorola Mobility, and will also shut down 30 of its 90 facilities worldwide. Two-third of the lay-offs will take place outside the U.S.
Google entered into a definitive agreement with Motorola Mobility Holdings Inc. on August 15, 2011, through which Google picked up a 100% stake of Motorola Mobility for $40.0 per share in cash or a total consideration of approximately $12.5 billion. Google closed the deal in May 2012.
The reason for the acquisition was Motorola’s 17,000 worldwide patents as well as another 7,500 patent applications, which could help Android fight off competition from the likes of Apple (AAPL - Free Report) , Research In Motion (RIMM) and Nokia (NOK - Free Report) that have competing mobile operating systems.
While some feel that Google is contemplating its own hardware business under the Motorola banner, we think it unlikely considering the lower margins typical of a hardware business, Motorola’s lack of success in recent years and the fact that it puts Google in direct competition with hardware partners, such as Samsung and HTC. But much could change over the next few years.
Motorola has now generated losses in 14 out of 16 quarters and the business continues to struggle. Google therefore decided to bring it to profitability by cutting down Motorola’s excessive workforce including 40% of its top management. It is also trying to reduce Motorola's product portfolio, which includes 27 different models of phones including several low-end models.
Motorola has lost ground to Apple and Samsung, but Google thinks that a few select models (with in-demand features such as voice-recognition sensors and long lasting batteries) would enable the company to compete more effectively.
The whole exercise will cost Google roughly $275.0 million in severance costs, impacting its profitability in the third quarter.
Google hopes to bring the loss-making handset maker to profitability, which could result in and some Android-based smartphones with cutting-edge hardware going forward. Motorola’s patents and experience in the smartphone hardware segment coupled with Google’s strategic planning could ultimately help the company to create a viable product portfolio in the already over crowded smartphone market.
In the second quarter, Google has done very well with its gross revenue touching a record $12.21 billion. Revenues from both Google-owned and partner sites continued to grow in double digits on a year-over-year basis.
Google retains a Zacks #3 Rank, which translates into a short-term Hold recommendation.