Google is Asking Way Too Much for Motorola’s TV Set-Top Box Business

Hardly have the U.S. and European regulatory bodies signed off on its $12.5 billion acquisition of Motorola Mobility (NYSE:MMI), Google (NASDAQ:GOOG) is already planning to sell off its TV set-top box business, a New York Post claims in a report last week. ^[1] This seems to be quite a departure from earlier claims by Google’s CEO Larry Page that he plans to leverage that business in his plans to “revolutionize the living room.” The report claims that Google is looking for no less than $2.5-$4 billion for the business.

See our complete analysis of Motorola Mobility here

Why the asking price is a little too much

Motorola’s set-top box business has seen declining market share as well as revenues over the past few years. 2008 was the peak year for the business, as revenues grew 18% to almost $4.5 billion. Since then, revenues have fallen to only about $3 billion in 2011, as per our estimates. Anticipating the decline, Motorola even tried to unsuccessfully sell the business in 2009 for $4.5 billion.

By our estimates, Motorola’s TV set-top box business accounts for just less than 12% of the company’s total value. Google paid a premium of 63% over the then market price to bid for all of Motorola’s outstanding equity for about $40/share. While our fair price estimate for all of Motorola Mobility is about $22, Google’s acquisition plans have taken the stock up to $40. At this market capitalization of about $12.5 billion, Motorola’s TV set-top business has a value of only about $1.5 billion. (12% of $12.5 billion)

The $2.5-$4 billion that Google seems to be asking for this business is a premium of 67-267% over our estimated fair value and therefore seems a tad overpriced in our opinion. Moreover, the Post claims that Google isn’t the only one looking for buyers for the business. Even Cisco is looking to sell off the Scientific Atlanta set-top business that it had acquired in 2006. Two other smaller cable-box players, Pace and Thomson’s Technicolor, are also expected to tap the marketplace for potential buyers.

Which begs a very pertinent question. If all the major players are looking to sell off their businesses, who is going to buy them? Moreover, won’t the availability of too many similar businesses for sale decrease each of their individual value? In such a case, who will be willing to pay Google a premium of 200% for the business?

But surely, having agreed to pay such a huge premium for Motorola Mobility, Google will now probably settle for nothing less. Or is it just a negotiating tactic and the asking price is going to come down in the future as Google tests the waters? Looking at our valuation for Motorola Mobility’s business, it seems that the latter is more likely.

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1. Google looking to unload Motorola’s TV set-top box business, New York Post, March 7th, 2012 [↩]