Google's Motorola Mobility detour: Running the numbers

Google's Motorola Mobility detour: Running the numbers

Summary: Now that Moto X is more like Moto Ex, Google sheds a lot of future profit headaches. Google's overall return on its $12.5 billion purchase of Motorola Mobility is debatable, but the search giant looks like it hit eject just in time.

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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.

moto x
Moto Ex

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 

For Google, it's still all about the patents

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):

pitz math

 

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.

Topics: Mobility, Android, Google, Lenovo, Smartphones

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21 comments
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  • That 12.5B purchase price was later revised up to 13B after the dust

    from the restructuring settled. Also of note the Moto patents have been pretty worthless so far. Where moto has sued others like MS they have lost. Where moto has been sued by others like MS moto has also lost.
    Johnny Vegas
    • GOOG up almost 7% today

      I would say the market reacted favorably.
      symbolset
  • Stock Price

    This is ALWAYS overrated, but I have a hunch that, in general, folks will see this as either a neutral or slightly net positive to GOOG. I don't think anybody thought that Google would be able to do handsets well.
    m0o0o0o0o
    • BUT

      Lenovo probably can. It looks like a pretty good buy at a pretty good price for them.
      m0o0o0o0o
  • My understanding is that Motorola extorted Google into the purchase.

    I believe the CEO of Motorola stated before the acquisition that Motorola was going to sue the other Android device manufacturers for patent infringement. Most of the other Android manufacturers were already paying patent licensing fees to Microsoft or Apple or both.

    So Google bought Motorola Mobility to protect the profitability of Android for its other partners. Then the biggest fear was that Motorola Mobility would become the Android leader and all other Android device manufacturers would get inferior treatment from Google. Selling off Motorola Mobility in order to alleviate those concerns makes sense.
    Michael_Sw
  • Google created the patent valuation bubble

    Google bid up patents in the Nortel deal and started that whole bubble. Also, cost of the Moto lawsuits it got itself embroiled in?
    mary.branscombe
    • It's like an argument

      You can't have a bidding war without multiple parties.

      To say it's google at fault ignores the fact that others were willing to pay almost as much.
      Little Old Man
  • Great

    Motorola Mobility deserved being outcast into a Chinese division of Lenovo. One time will tell when the U.S. side will be closed and moved overseas.
    TimeForAChangeToBetter
  • Motorola X sales would have been better

    Motorola X sales would have been better, but given the recent updates debacle, who wants to spend money on a device with an uncertain future when the company behind it when the company behind it ca't be trusted when it broke one promise after another?
    lehjr
    • Well, not knowing this was going to happen...

      ...I used my Verizon contract expiration to upgrade to a Droid Maxx (for those who don't know its basically the same hardware as the Moto X but with a 5 inch screen, bigger battery and 32 GB storage). I love the phone but now have to wonder if its going to get quickly orphaned...like the Droid 3 I just upgraded from. The Droid 3 was orphaned almost from the moment I bought it. Have I gotten burned again? Well, I did get the Android 4.4 update two weeks after I bought it. I was miffed it didn't already have it like both the Verizon and Motorola advertising said it did but at least I didn't wait too long.

      I guess that I sort of expected that the relationship with Google would make the Moto phones a bit more future proof....but I guess not.
      cornpie
  • Good apologist piece for Google

    Google got hammered in this whole thing. All you're doing is pushing the numbers around to mask the ugliness of it all. Believe it or not, Google makes epic mistakes just like the rest of them.
    Speednet
    • And you evidence is ...

      ... Oh!

      You just made it up! Well, there's a surprise!
      Heenan73
  • Lol

    The $5.5 billion is valuation of the patents is like when Kevin was fired in the office for using the number "keleven".

    "A mistake plus keleven gets you home by seven!"
    Speednet
  • Question is, what will Lenovo do with Moto now?

    Getting into the cell phone business is a huge gamble. There are so many variables its not even funny.
    Lenovo better be ready to compete in a global market that is viciously competitive. And they better be willing to restructure Moto to a profitiable company very quickly.
    I have seen this business from the inside of the operation. Moto hasn't brought anything new to the cell phone market since the razor phone. They are behind by years and in this field, they cannot afford to be if Lenovo wishes to keep them in the business. They need to stop letter the accountants run the company and let the engineering team develope new technology that will drive them forward. Though at this time I'm not sure Moto has much left to give of themselves.
    I'm betting the portion of the business will be completly moved over seas now. Meaning many in the US will lose jobs. Google spent millions try to setup and operate a plant in Fort worth, tx. So they could assemble the phone in the US. I wonder what Lenovo will do with that? I'm betting its going out of the US soon.



    Best wishes Moto.
    bradh1205
    • Lenovo

      The Chinese Government is behind them so they won't fail.
      Alan Smithie
  • Motorola has had excellent hardware for years.

    I'm disappointed they couldn't stay afloat through the storm. Lenovo is okay as an OS, but we have all seen better.
    nesdave
    • ...too long in the family

      Yeah, Moto screwed themselves several times.

      1) not seeing that CDMA and GSM were the future, not Analog and TDMA.
      2) divesting ONNN and FSL
      3) mostly missing the boat on smartphones (aligning with Symbian instead of MSFT)
      4) Not capitalizing on their RIM victory (almost had a Crackberry before BBN existed)
      5) Not focusing on wireless, ultimately letting Qualcomm and Broadcom to take away what should by rights have been their own market
      6) etc. etc.

      For a company with what amounted at one point to the biggest collection of deep-RF-expertise in the world to go this route, when today d*mn near everything is wireless, is unforgivable. Sad, sad, sad.
      Moeity
  • If NASDAQ are happy ...

    ... then Google's shareholders are happy.

    NASDAQ *is* happy; Go Google GOOG.

    So relax.
    Heenan73
    • Why do you think Google waited till now to sell them?

      their earnings report were likely going to come up a bit short, so the best way to get a gangbuster earnings call is to sell off a losing piece of business right before the call.
      William.Farrel
  • Maybe Google Is planning something

    If I was running Google I would take the money that I pulled in from this sale and use it to purchase Black Berry!

    As Google has all of the Motorola patents they are no longer an issue for Google or Android or their Linux Business!

    If they use these funds to purchase Black Berry that would then provide them with all of Black Berry's patents as well as a owning share of Rock Star to put an end to those patent issues as well.

    Obviously Google could then further improve Android by freely integrating any black berry technologies it chooses into Android.

    I would use the capital from this sale as well as partner the purchase with Samsung as they have a good patent arrangement already to split the purchase as well as bring in other partners that are willing to make the same arrangement!

    Even if they have other idea's in mind they certainly will have a large portion of capital ready to further their technological and patent portfolio and it is always better to just by a company when you can then have to provide patent tax from the fruits of your labor.

    Until the patent system is abolished sadly companies will keep having to go through this pain just to expand and stay in business as the companies that no longer innovate or produce products worth buying will continue to patent troll just to attempt to turn a profit to stay afloat!

    Knowledge should never be allowed to be owned by anyone to establish a monopoly for 100 years... It just creates a system of slavery!

    It is strange that no one ever mentions Motorola's other products. Motorola used to make a nice high performance Firewall as well as PBX hardware and other technologies not just cell phones!
    timothy.m.butterworth