Google gets discounted Droids

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.

What would Palm be worth today?

by Brenon Daly

We have to hand it to Palm Inc – the smartphone maker got out while the getting was (relatively) good. At least that’s one way to think about Palm’s decision to sell to Hewlett-Packard in April 2010 for $1.2bn. Hitting that bid looks even smarter in light of the beating that Research In Motion has taken since then, including Friday’s capitulation by many longtime shareholders. Consider this: since Palm became an HP business, RIM on its own has lost 80% of its market value. (Meanwhile, the Nasdaq is up slightly during that period.)

While some of RIM’s staggering decline can be traced back to the company’s own missteps around product delays, its fortunes also stand as a sort of proxy for the ‘non-hot’ (i.e., not Apple iOS- or Google Android-based) mobile market. And in that way, we shudder to think how Palm would have fared there if it remained a stand-alone smartphone vendor.

After all, Palm was barely holding on with a single-digit market share, not to mention the fact that it was teetering financially at the time of its sale. The unprofitable company was burning cash and, in the quarter the deal was going through, had just forecast that sales would fall off a cliff. In contrast, RIM is still profitable and growing. But you wouldn’t know that from the relative valuations of the firms. In its sale, Palm was able to fetch a not insignificantly higher valuation than RIM currently garners on the market.

RIM calls internationally

by Brenon Daly

As Research In Motion gets set to report fiscal first-quarter financial results later this afternoon, investors will be paying particularly close attention to the company’s international business, which has essentially provided most of the growth it has put up recently. Overseas sales have outstripped lackluster sales in RIM’s core markets of the US and Canada to the point where the home markets account for less than half of total sales.

It’s perhaps fitting, then, that RIM’s acquisition strategy shares a similar cosmopolitan approach. We’ve already noted the company’s recent acceleration of M&A activity, with the smartphone maker announcing as many deals so far in 2011 as it did in all of 2010. And yet, that deal flow has increasingly been coming from overseas. RIM’s previous two acquisition targets – Scoreloop, a mobile gaming developer, and mobile device management vendor ubitexx – were both headquartered in Germany. Add in its December purchase of Swedish design firm The Astonishing Tribe, and fully three of RIM’s eight deals over the past year have been done overseas.

Disconnected at Palm

Contact: Brenon Daly, Chris Hazelton

Palm Inc has lost a key set of hands. In an SEC filing Friday, the troubled company said that the head of its software and services, Michael Abbott, will be cleaning out his desk by the end of this week. (No word yet if he’ll also have to give back his smartphone.) The departure is significant because Abbott was responsible for building third-party developer support for Palm’s smartphone platform, which has lagged well behind the developer communities for Apple’s iPhone and Google’s Android OS. It also underscores one of the key problems at Palm, which we explored in more depth in a recent report.

Specifically, Palm has precious little to show for its efforts to stay relevant in the mobile world. Here’s our back-of-the-envelope math: the company will spend in the neighborhood of $300m on sales and marketing and another $200m on R&D for the current fiscal year, which ends next month. (The levels are basically annualized totals from the first three quarters of the current fiscal year.) We would also add that they are significantly higher than spending levels at rival vendors. For instance, Palm spends 2.5 times more on R&D (as a percentage of revenue) than Blackberry maker Research In Motion.

Adding together sales and marketing plus R&D spending at Palm, we get about $500m, compared to projected revenue of about $1.1bn. And what does the company have to show for that half-billion-dollar outlay? Palm’s already tiny slice of the smartphone market actually got smaller this fiscal year. And yet, despite that dismal return on investment – not to mention a key executive departure – speculation continues to swirl that Palm will get snapped up. Most often, HTC, Lenovo or even Motorola are named as suitors for Palm. However, in our report, we note key reasons why those vendors wouldn’t be interested. For our money, Dell still seems the most-logical buyer of Palm.