A ‘patently’ big deal for Google

Contact: Brenon Daly

Google said Monday that it plans to hand over $12.5bn in cash for Motorola Mobility, spending more for the mobile company than it has, collectively, on the more than 100 acquisitions it has done in its history. The deal makes it more likely that Google, which will continue to offer its Android OS free to other handset manufactures, will be able to more deeply integrate the hardware and software on future devices. Additionally, Google will be gaining substantial heft in its patent portfolio, with the Motorola division counting some 17,000 issued patents and another 7,500 pending. That’s a key concern for Google, which has found itself at the center of several IP-related lawsuits.

Under terms, Google will pay $40 for each share of Motorola Mobility, for an equity value of some $12.5bn. While the bid represents a premium of 65% over the previous closing price of Motorola Mobility, it is only slightly above the price the shares fetched on their own in the days following their debut back in January. (Under pressure from activist investors including Carl Icahn, 80-year-old Motorola split itself into two companies at the start of 2011. The remaining company, Motorola Solutions, sells primarily networking and communications technology and is unaffected by Google’s proposed acquisition of the smaller but faster-growing mobile division.)

In looking at the price, however, we should note that Google will enjoy a substantial ‘rebate’ when the deal closes because Motorola Mobility basically carried no debt but held nearly $3bn in cash. So Google’s net cost is closer to $9.5bn, which works out to just 0.75x the $12.7bn of revenue that Motorola Mobility has generated over the past four quarters. Google shares, which have underperformed the Nasdaq for nearly all of 2011, were down slightly Monday on an otherwise up day on Wall Street. We’ll have a full report on the transaction in tonight’s Daily 451.