Tag: MMI

‘Googorola’ close to closing

Brenon Daly

Contact: Brenon Daly

In what could be its last financial report before it is formally acquired by Google, Motorola Mobility said after the closing bell Thursday that mobile device revenue in the third quarter rose 20% over the same period last year to $2.4bn. That was nearly twice the overall rate of growth at the company in the quarter, although it was a slower rate than the mobile device division had grown in earlier quarters this year.

The main drag on the unprofitable division was anemic sales of its Xoom tablet, with the company indicating that it shipped just 100,000 units in the quarter. That’s just half the number it shipped in Q1 and one-quarter the number it shipped in Q2. But Motorola Mobility did manage to ship more smartphones in the just-completed quarter (4.8 million) than it did in either of the two previous quarters.

And once Google does assume ownership of the company, it may well see a slight bump in demand for those devices, at least according to a finding by our ChangeWave Research division. In late September, ChangeWave asked more than 4,100 consumers what impact Google’s acquisition of Motorola Mobility would have on their plans to buy a smartphone from the combined company. The vast majority said Google’s ownership wouldn’t have any impact. However, of the respondents that indicated a preference, four times the number said they were ‘more likely’ (13%) than said they were ‘less likely’ (3%) to buy a smartphone from the combined company in the future.

The planned $12.5bn sale of Motorola Mobility stands as the second-largest tech acquisition announced so far this year. (The purchase doubled Google’s aggregate M&A spending.) Shareholders in the Libertyville, Illinois-based company are slated to vote on the proposed deal November 17, although it will still need to be cleared by regulators. Assuming that all goes to plan, Google should close its acquisition of Motorola Mobility by the end of the year or early next year.

A little something for your trouble

Brenon Daly

Contact: Brenon Daly

Breaking up is hard to do. And it can be expensive, too. But as a pair of deals this week shows, the costs aren’t necessarily borne equally by the two sides in a planned transaction. In the higher-profile case, the market is buzzing that Google may be on the hook for a $2.5bn payment to Motorola Mobility if that deal unravels. If that’s the case, the payment (known as a reverse breakup fee) would be 6-7 times larger than the payment Google would stand to pocket if Motorola Mobility walks away from the transaction.

That gap is much wider than is seen in deals that feature reverse breakup fees, where a would-be buyer might face a fee that would be closer to twice the amount the seller might pay. That’s how it is, for instance, in Permira’s planned $440m buyout of education software maker Renaissance Learning. According to terms of Tuesday’s leveraged buyout (LBO), if Permira walks away from the transaction, it will have to come up with $26m, or nearly 6% of the equity value of the proposed deal. On the other side, if Renaissance Learning backs away, it will have to hand over just $13m, or about 3% of the equity value.

Reverse breakup fees have long been an accepted way for a would-be seller to receive compensation for any risks in getting a transaction closed. (The rationale is that the disruption in business due to an acquisition is much greater to the target company than the acquirer, so the greater potential risk is offset by a greater potential reward.) Of course, these fees are far more common in LBOs than when the deal is struck between two companies, like Google buying Motorola Mobility. But then again, the search giant – going back to its Dutch auction IPO and continuing to today’s practice of not giving quarterly financial guidance – has never been a company that really follows Wall Street convention.

Google gets discounted Droids

Brenon Daly

Contact: Brenon Daly

Google didn’t have to reach too deeply to fatten its patent portfolio as it also becomes one of the few vertically integrated smartphone and tablet makers. Sure, it will have to hand over $12.5bn in cash for Motorola Mobility to cover its planned purchase of the hardware manufacturer. But it will immediately get back some $3bn in cash from Motorola Mobility, as well as an undisclosed amount of tax advantages that can be used to lower the amount of taxes that the wildly profitable search giant will face in the future. Even setting aside the very real tax breaks, Google is on the hook for just $9.5bn for Motorola Mobility.

The enterprise value of $9.5bn works out to just 0.75 times the $12.7bn of revenue that Motorola Mobility has generated over the past four quarters. That’s less than half the median valuation (1.8x trailing sales) of all tech transactions announced so far this year, according to our calculations. Further, it’s just one-third the multiple of 2.2x trailing sales that we calculated for the 50 largest deals (by equity value) so far this year.

More relevantly, it’s half a turn less than Hewlett-Packard paid in 2010 to bolster its integrated mobile strategy. Last April, HP paid $1.4bn for Palm Inc in a transaction that valued the struggling company at some 1.1x sales. (And we could certainly make the case that Motorola Mobility is in better financial shape than Palm, which was burning cash amid a dramatic sales slowdown.) Another way to look at it: Google’s bid values Motorola Mobility only slightly above the current market multiple for fellow mobile device vendor Research In Motion. But then, we should add that shares in the Blackberry maker are currently changing hands at their lowest level in a half-decade.

A ‘patently’ big deal for Google

Brenon Daly

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.