This article is written by Srishti Kaushal, a first-year student from Rajiv Gandhi National University of Law, Punjab, pursuing B.A. LLB. (Hons.). In this article, she discussed the reasons behind Google’s acquisition of Motorola Mobility and its sale to Lenovo at an apparent loss of $10 Billion.
The world was left in shock in 2011 when Google announced that it will be acquiring Motorola Mobility for $12.5 Billion. This was the largest acquisition by Google which completely baffled its shareholders. Further, in 2014 Motorola Mobility was sold to a Chinese technology firm, Lenovo at the price of $2.91 Billion. On the face of it, this seems to be one of the biggest losses that Google has ever incurred. However, in reality, this was a master-play in which Google emerged as a winner.
In this article, we will look into Google’s rationale behind this deal and whether this acquisition was actually a loss for Google.
But before moving forward, let’s understand what the companies Google Ltd. and Motorola Mobility are all about.
Google Ltd. is an American multinational company that specializes in Internet-related services. It is considered to be one of the biggest technology companies in the world. Though initially, it started as a core search engine, its massive growth triggered a number of partnerships and acquisitions, which continues to grow today.
Google is the proud owner of the Android mobile operating system (OS), which has been the best selling OS in smartphones since 2011. Along with this, Google also offers services like Google Maps, Google Calendar, Google Drive, etc, that come along with the Android software.
Motorola Mobility is a consumer electronics and telecommunication company. It primarily produces smartphones and other mobile devices, which are based on Android operating software, which is developed by Google. It was formed after a split of Motorola into 2 segments, Motorola Solutions (focusing on companies enterprise-oriented business units) and Motorola Mobility.
Google and Motorola Business Deal
On 15th August 2011, Google announced, through a blog post on its site, that it acquired Motorola Mobility for $12.5 billion. It paid $40 per share for this. This amount was 63% more than the price at which Motorola Mobility closed on August 12. This deal was unanimously approved by the directors of both companies, but it still took a lot of regulatory efforts before Google was allowed to move ahead with the acquisition.
Google’s acquisition of Motorola resulted in a vertical merger. A vertical merger is a merger of 2 or more companies involved at different stages in the supply chain for a common good. In this case, the common good was the smartphone. While Google provided the software to go into the mobile phone, i.e., Android, Motorola Mobility provided the hardware, i.e, the mobile phone itself. Google announced that it would run Motorola Mobility as an independent company and finally received approval from the United States Department of Justice and the EU on 13th February 2012, and from the Chinese authorities on 22nd May 2012.
Why did Google acquire Motorola Mobility?
This deal is one of Google’s biggest buys. Let’s understand what were the possible reasons that encouraged Google to follow with this deal.
- Google is one of the greatest names in the software industry and with more than 80 years of service, Motorola Mobility is a great hardware company. Between 2010 and 2011, the smartphone industry observed an increase in the shipment from 4.1 million units to 5.1 million units. Because of this, Google saw a high potential in the smartphone market. The Motorola acquisition allowed Google to enter into the mobile-hardware manufacturing industry without having to work from scratch.
- Google realized that no Operating system is worth anything unless there is a handset. The Android Market was dominated by Samsung, which owned approximately 50% of the market share. Google realised the danger this posed. If Samsung decided to leave Android and develop its own OS (which it was trying to do) or partner with a different OS, Google would be left in a loss. Acquiring Motorola allowed it to increase its interference in the hardware manufacturing market and lessen Samsung’s threat.
- Motorola Mobility has been involved in the development of intellectual property and innovation in communication technology for a long time. In fact, it is responsible for the introduction of the world’s first portable cell phone. With this acquisition, Google acquired 24,500 patents at a rate much less than their actual price.
- Google has many creative ideas to modernize its software and thereby the smartphones. Ron, the former product head at Google had said that because of the unaccommodating hardware of the manufacturers, Google has not been able to implement its creative ideas like getting an instant signal when the phone owner walked into a restaurant and start streaming menus and reviews.
This acquisition allowed Google to implement its creative ideas as it got control over the hardware of Motorola and thus got an opportunity to integrate its software and hardware capabilities. This can be understood by looking at features the Moto X(the phone Motorola and Google created together) had. It included a virtual ear that got enabled with the words okay, Google Maps, Mail, Search etc.
- Many of Google’s Android partners had started to alter the android. Samsung, the biggest android user, for instance, had begun degrading it by switching out various parts like video and music player, phone dialer, notification centre, calendar, etc. It also started to hide Android and thus Google’s role in its smartphones. This was done using ‘TouchWiz’, a skin that was developed by Samsung itself and sued to paint all over Android. The instalment of this skin further undermined and degraded Android’s performance as it slowed down Android and wasted storage space.
The smartphones which Google developed alongside Motorola enabled it to install a pure android system in the phones, which showed technologically advanced features of Android.
Moreover, this step showed that Google can use this partnership to ramp up its own hardware business, promote Android and easily gain greater market share. Hence, it sent out a warning to the other partners to stop messing around with Android.
- Avoiding taxes was another reason for this acquisition. When Google acquired Motorola, it was a loss-making, money-bleeding company, with carried forward taxes. Google set off these losses with its profits and thereby avoided huge amounts of taxes.
- It also enabled Google to build better relations with television manufacturers, owing to Motorola’s set-top box system.
Why did Google sell Motorola Mobility?
On January 29th 2014, Google announced that it sold Motorola to the Chinese technology firm, Lenovo for $ 2.91 billion (out of which $750 million were given by way of shares). While selling Motorola Mobility, Google retained its Advances Technologies and Projects Unit, which was integrated with the original Android team, and almost all the acquired patents. Let’s understand why this sale was made.
- In the Android phone hardware business, the margins are very less (not more than 2 to 3%). Google realized that unless it is a dedicated electronic manufacturer, it would be very hard for it to gain success in this industry.
- Under Google, Motorola’s operating losses were increasing. In fact, between the 2nd quarter in 2012 and 3rd quarter in 2013, its operating expenses amounted to $1.94 billion. Because of lesser margins, Google observed that it is impossible to turn it into a profitable business for at least a few more quarters.
- As a result of the acquisition, fear was created in the minds of the Android partners that Google would compete with them directly. They thus started to create or buy their own operating software. For instance, Samsung created Tizen and LG WebOS. By selling Motorola Mobility, Google reappeared as a neutral, honest Operating Software (Android) broker to the world.
Was the sale of Motorola Mobility truly a loss to Google?
Though on the face of it, the sale of Motorola Mobility appears to be a loss of nearly $10 million to Google, reality might be a little different. Let’s understand Google’s rationale behind this move.
- Financially speaking, Google actually made a profit out of this deal.
- When Google acquired Motorola Mobility, it had inherited a cash pile of $3.2 Billion and deferred tax assets of $ 2.4 Billion, the net acquisition becoming $6.9 Billion ($12.5 Billion – $ 2.4 Billion – $ 3.2 Billion)
- Further, Google sold Motorola’s set-top box business to the Arris Group for $2.3 Billion. It also sold Motorola’s factories to Flextronics for $ 75 million. This reduced the total acquisition to 3.85 Billion dollars. ($6.9 Billion – $2.3 Billion – $75 million)
- At the end of this acquisition and sale, Google retained patents worth $5.5 Billion.
- Thus, even after accounting for the loss of $2 Billion caused because of the operating expenses of Motorola Mobility, Google was still left with a profit of approximately $2 Billion. (-$3.85 Billion – $2 Billion + $5.5 Billion)
- This deal enabled Google to design a smartphone of wide appeal and transform Motorola Mobility into a healthy competition for Samsung and other Android smartphone makers, especially in the low-cost market.
Moreover, because of Lenovo’s amazing international presence ( it is the 4th largest smartphone seller worldwide), Motorola got an opportunity to reach the Asian markets, where cheaper phones are in high demand, and compete with Samsung and other Smartphone manufacturers there as well.
- Moreover, if we take into consideration the fact that Google sold the Motorola branded Android phones at the cheapest possible rates, it becomes evident that Google never wanted to maximize its profit through Motorola Mobility. Its actual aim was to get more people to use Android and thereby Google services, the way Google actually makes money. This aim was achieved by Google through this deal.
- Because of this deal, Google paid less than a billion dollars for patents worth $5.5 Billion. These patents would help Google in defending the Android ecosystem in the midst of the intellectual property battles.
- The deal forced Samsung and other Android smartphone manufacturers to reduce their android alterations. This is evident in the deal signed between Google and Samsung on 27th January 2014. Though this deal was a wide-ranging patent deal which will last a decade, in the provisions of this deal another important deal was hidden whereby, Samsung agreed to tone down TouchWiz, refocus on core Android apps and stop unnecessary customization.
This deal also strengthened the position of Android as a mobile platform. Thus making it tougher for hardware manufacturing firms like Samsung to launch its own OS like Tizen or LG to create its OS, WebOS.
Google’s strategy of acquiring Motorola at $12.5 Billion and selling it off to Lenovo at $2.91 came to be a masterpiece. It didn’t only gain monetarily despite the massive acquisition fee, but also created phones that pushed technology and promoted Android and the other Google services. Thus, it used the android platform which Motorola Mobility used and made it a gateway for its own promotion and advertisement.
Through this, it smacked down upon the Android smartphone manufacturers like Samsung who tried to take all the credit of the system and prevented them from hiding Google’s contributions. Moreover, the sale to Lenovo allowed Google to leave Motorola in the hands of a company that would be able to use it to offer competition to other manufacturers all around the world, especially in the Asian market.
Lastly, through this deal, Google acquired a lot of patents and also Motorola’s talented research division. The usefulness of these patents is still doubtful, but it can not be denied that Google made a profit worth billions of dollars by acquiring these.
Hence, clearly, Google played an amazing game through this deal and came out as the ultimate winner at the end.
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