Google's Motorola Mobility detour: Running the numbers
The timing of Google's sale of Motorola Mobility to Lenovo is perfect given that the company reports fourth quarter earnings Thursday and won't have to mention much about hardware profit margins and whether the smartphone unit can make money.
Simply put, when Moto X becomes Moto Ex a lot of Google problems go away.
In a blog post, Google CEO Larry Page said "the smartphone market is super competitive, and to thrive it helps to be all-in when it comes to making mobile devices." Translation: Google's handset business was going to be a money pit.
The nagging question about Google's Motorola purchase for $12.5 billion is this: Was it worth it? A few folks have tried the math on this one, but it appears Google made out ok. The real returns depend on how Google can treat Motorola's tax losses.
Here's the rundown based on SEC filings, Wall Street reports and some rudimentary arithmetic.
$12.5 billion: The total price Google paid for Motorola Mobility.
$9.5 billion: The price Google paid for Motorola Mobility net of cash.
Lenovo buys Google's handset business, US plan for $2.91 billion
The deal was always about patents, but when Google bought Motorola Mobility it really looked like the Android ecosystem was going to get sued to oblivion. Oracle went after Android and that suit could have been a precursor to more. Android hardware vendors cut deals with Microsoft on patents. There was also a patent valuation bubble and Google didn't have much in the wireless intellectual property war chest.
What did Google get from Motorola? A home business that was divested. A handset business that was sold to Lenovo. Manufacturing assets that were largely divested. People that were restructured. And patents that were used to build a war chest to keep Android safe from lawsuits.
In the end, the only way to evaluate Google's purchase of Motorola is to put a price on the patents.
$816 million: Motorola's estimated operating loss in 2014, according to Pacific Crest. Moto X wasn't a big hit and Motorola wasn't going to make money in 2014.
$645 million: For nine months ended Sept. 30, Motorola Mobility had an operating loss of $645 million on revenue of $3.2 million.
$393 million: For 2012 as part of Google, Motorola had an operating loss of $393 million on revenue of $4.14 billion.
More than $2 billion: What Google will probably have lost on Motorola Mobility following the company's earnings report on Thursday. The tab for Google so far is $1.85 billion in operating losses.
The biggest takeaway here is that Motorola Mobility swiped about $2 a share in earnings from Google annually. There was also management distraction.
Gains
$2.35 billion: Total consideration Arris paid Google for Motorola Mobility's home business. That deal was announced Dec. 19, 2012.
$2.91 billion: The price Lenovo paid for Google's handset business. Props to Google for getting out semi-gracefully. Google's profit quagmire with Motorola ended quickly.
$2.4 billion: The value of Motorola's deferred tax loss assets, according to Pacific Crest. It's unclear whether Google gets to keep these tax losses with the sale of Motorola to Lenovo. But they are valuable to offset Google's tax tab. These losses basically make or break the return calculation for Google's Motorola adventure.
Pacific Crest Evan Wilson said:
Google paid $12.5 billion for Motorola in 2011. After selling Motorola Home for $2.35 billion and excluding $3.2 billion in cash, the total price Google paid for the remaining assets is approximately $4 billion. The treatment of Motorola's deferred tax loss assets, which totaled $2.4 billion, is unclear. If Google retains them, the price comes down to $1.6 billion. Clearly, after recent litigation, the patent portfolio was not worth $12.5 billion (total purchase price), $9.3 billion (the enterprise value) or $7 billion (after selling Home). However, if Google did secure the patents for $1.6 billion, this seems reasonable, although Google did have to finance operating losses while this played out.
$5.5 billion: This value represents what Motorola's patents are worth to Google based on the company's SEC filings. Google keeps this patent value on its balance sheet. If Google has a write-down, the Motorola equation changes. Many analyst value Motorola's patents at about $4 billion. Jefferies analyst Brian Pitz did the following math (he doesn't include tax assets in his calculation):
The problem with that math is that it doesn't count Motorola's operating losses in the equation, but even if you tack those on (call it an operating loss of $2 billion) you could get Google to break even by putting a value on patent litigation that didn't happen because of the Motorola patents. You could also include tax losses as an asset.
Bottom line: The returns on Google's Motorola purchase will be debated for a while, but the search giant didn't get hosed and may have even broke even. Google could even generate a small return on the Motorola Mobility purchase, but I'd argue that the opportunity cost and management distraction would have offset any accounting gain.