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Google to Divest Motorola's Home Biz

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Google Inc. plans to sell off the Motorola Mobility business unit that manufactures set-top boxes and other home-networking gear, according to Bloomberg. Google shares rose 1.6% to $688.01, at the close of trading yesterday.

A few sources stated that the search giant has hired Barclays to negotiate a possible sale of the business. Though the process is still in its early stages, Google is expecting the business to fetch around $2 billion.

Earlier this month, Google announced that it would cut 4,000 jobs at Motorola Mobility and close about a third of its 90 facilities, as a part of its plan to restore the hardware firm’s leadership in the mobile market.

To recap: Google had entered into a definitive agreement with Motorola Mobility Holdings on August 15, 2011. The company picked up a 100% stake for $40.0 per share in cash, or a total consideration of approximately $12.5 billion. The deal was the biggest in its 13-year history and was completed in May 2012. The acquisition propped up Google’s portfolio with more than 17,000 patents.

When Google announced its decision to purchase Motorola Mobility, it was apparent that the purchase would expand its expertise in wireless technology and handset design. At the time, we doubted Google’s intention of entering the handset hardware business given the automatic rivalry it would create with hardware partners and the negative impact of an essentially lower-margin business.

However, the market has changed a lot since then and some hardware partners, such as Samsung and HTC have a lot at stake. Therefore, they are unlikely to abandon Android simply because there is another Android device in the market.

In this respect, we should keep in mind Google’s initial interest in the mobile segment – the maintenance of its search market share. It is now apparent that Apple is moving away from Google and could soon remove Google as the default search engine on its devices. This would be a big blow to Google because it is still hugely dependent on Apple devices for advertising dollars.

At the same time, Microsoft (MSFT - Free Report) is spending billions on Bing and it makes sense for the two to combine. User experience appears to be the only thing in the way. Therefore, Google needs a smartphone where there is a good marriage between the hardware and software components so it can take on Apple (AAPL - Free Report) and reverse the losses it would no doubt incur if Apple no longer plays ball.

Google is a market leader in online advertising and its mobile strategy has been bang on target so far. In the second quarter, revenues from the Hardware and Other segment (mainly Motorola, but also Nexus 7) accounted for 10% of revenue, with 67% coming from mobile products and the balance from home products. Historically, Google has always fared better than Yahoo Inc , which has been struggling to uphold itself, and Microsoft, which has yet to gain critical mass.

However, legal entanglements related to competitive matters or patent infringements remain an overhang. Google retains a Zacks #3 Rank, which translates into a short-term Hold rating.

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