Google’s Motorola Mobility Acquisition Hit by Temporary Regulatory Delays

Motorola Mobility’s (NASDAQ:MMI) acquisition by Google (NASDAQ:GOOG) seems to have hit a bump in the road with EU regulators suspending their antitrust review on the deal until more information is made available. ^[1] Google had announced its plans to acquire Motorola for about $12.5 billion in August this year, and we believe this setback is a temporary one. Last month, Google secured approval from Motorola’s shareholders for the acquisition. Motorola’s huge patent portfolio will provide Google with an armor to protect itself and its partners that use Android on their handsets against lawsuits filed by rivals such as Apple (NASDAQ:AAPL).

See our complete analysis for Motorola stock here

The merger will be complete in 2012 after it secures all regulatory approvals. Antitrust review does take some time and EU’s request for more information is routine, a Google’s spokesman confirmed. ^[1] We believe EU’s request should not concern investors about either of the two companies. The smartphone industry has enough competitors for the regulators to find the merger anti-competitive. If anything, the merger will serve to bring down prices and increase competition.

Google eyes growing mobile search market

Apart from the patent portfolio, Google also has its eyes on Motorola’s hardware business. Google already is a dominant player in the online search business for desktops and notebooks. However, as the PC growth slows and more users adopt smartphone to stay connected on the move, an increasing number of Internet searches will be performed on mobile phones and online ad dollars will shift to mobile advertising.

The mobile OS, Android, was its way of entering the smartphone market. Now, armed with Motorola’s hardware business, Google may plan to come out with a cheap smartphone to increase the demand for Android smartphones, thereby increasing its presence in the growing smartphone market. (see Are Cheap Google-Motorola Smartphones on the Way?)

While such a move may lead Google to take a hit on its margins, it may be worthwhile as it can help drive mobile ad revenues in the long run. Moreover, Google’s operating margins for its core search ad business are a healthy 42% – enough to absorb any near-term losses. This strategy is not very different from Amazon’s plan to sell the Kindle Fire at a very low price point in order to drive its core content distribution business and compete with Apple.

Also, Motorola has a cash reserve of around $3.3 billion, which means Google is only paying $9 billion for Motorola’s underlying business. That still leaves Google with about $30 billion, so the acquisition is not a significant drain on cash in spite of the huge premium Google has to pay for Motorola.

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1. Google, Motorola Mobility Merger Review Temporarily Halted by EU Regulator, Bloomberg, December 12th, 2011 [↩] [↩]