Google’s Motorola Mobility Deal Gets Green Light from U.S. and Europe

Google (NASDAQ:GOOG) received approvals for its proposed Motorola Mobility (NYSE:MMI) acquisition from both the European Commission as well as the U.S. Justice Department on Monday. ^[1] However, regulatory approvals in China and Israel are still pending. The acquisition plans were made public in August last year when the two companies announced that they have come to an agreement under which Google would buy out Motorola Mobility for $12.5 billion in cash. Google has maintained that the acquisition was made with Motorola’s strong patent portfolio in mind as it would help it better defend its Android mobile platform from lawsuits filed by Apple (NASDAQ:AAPL) and Microsoft (NASDAQ:MSFT).

However, we believe that Google has bigger plans in mind. While the addition of more than 17,000 Motorola patents will no doubt strengthen Google’s patent  portfolio, we believe that the 63% premium that Google has paid for Motorola’s rather under-performing mobile business needs a bigger justification in the form of a grander mobile hardware play.

See our complete analysis for Motorola stock here

Google eyes growing mobile search market

Google already is a dominant player in the online search business for desktops and notebooks. However, as PC growth slows and more users adopt smartphones 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.

Coming up with an open mobile platform, the Android OS, was Google’s way of entering the smartphone market. Now, armed with Motorola’s hardware business, Google may plan to come out with a good enough smartphone at cheaper price points to increase the demand for Android smartphones, thereby increasing its presence in the growing mobile search market. (see Are Cheap Google-Motorola Smartphones on the Way?)

Margins to decline

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. 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. Or Verizon, AT&T and other such telecom providers’ approach to drive data consumption by subsidizing smartphones.

However, similar to the margin hit that the carriers have suffered as a result of the smartphone boom, this may deepen the margin loss that Google will be suffering by acquiring Motorola’s business. We estimate that Motorola Mobility will generate $12.6 billion in revenues and only 69 million in operating profits in 2012. This will significantly dent Google’s overall operating margins to about 21% from 27% pre-acquisition.

Moreover, Google is simultaneously running the risk of alienating its Android partners, if it favors Motorola or alters the open Android platform to its benefit. This may cause partners to seek ways of lessening their dependence on the Android platform, which poses a direct threat to Google’s mobile search ambitions. It remains to be seen how Google is planning to alleviate such concerns.

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1. Google’s Motorola Bid Gets U.S. Approval, Bloomberg, February 14th, 2012 [↩]