Android Bombshell: Google Buys Motorola

| About: Alphabet Inc. (GOOG)

Google (GOOG) just announced that it will buy Motorola Mobility (MMI). Boards of directors of both companies have approved the transaction. Google will pay $40.00 per share in cash or about $12.5 billion.

This development is bound to make other licensees of Android unhappy. Such licensees include HTC, Samsung, and LG. Why would HTC, Samsung, and LG want to keep on using Android when Motorola may develop an operating system advantage? To assuage such concerns, Google has announced that it will run Motorola as a separate business and Motorola will license Android like anyone else.

Irrespective of what Google says, this announcement is sending shock waves throughout the mobile world.

As hard as Google may try, its efforts to assuage its partners may backfire. The following statement from Google is an example:

The acquisition of Motorola Mobility, a dedicated Android partner, will enable Google to supercharge the Android ecosystem and will enhance competition in mobile computing. Motorola Mobility will remain a licensee of Android and Android will remain open. Google will run Motorola Mobility as a separate business.

Following is the text of the press release:

Combination will Supercharge Android, Enhance Competition, and Offer Wonderful User Experiences

MOUNTAIN VIEW, Calif. & LIBERTYVILLE, Ill.-(BUSINESS WIRE)-Google Inc. (NASDAQ: GOOG) and Motorola Mobility Holdings, Inc. (NYSE: MMI) today announced that they have entered into a definitive agreement under which Google will acquire Motorola Mobility for $40.00 per share in cash, or a total of about $12.5 billion, a premium of 63% to the closing price of Motorola Mobility shares on Friday, August 12, 2011. The transaction was unanimously approved by the boards of directors of both companies.

"Motorola Mobility's total commitment to Android has created a natural fit for our two companies. Together, we will create amazing user experiences that supercharge the entire Android ecosystem for the benefit of consumers, partners and developers. I look forward to welcoming Motorolans to our family of Googlers."

The acquisition of Motorola Mobility, a dedicated Android partner, will enable Google to supercharge the Android ecosystem and will enhance competition in mobile computing. Motorola Mobility will remain a licensee of Android and Android will remain open. Google will run Motorola Mobility as a separate business.

Larry Page, CEO of Google, said, "Motorola Mobility's total commitment to Android has created a natural fit for our two companies. Together, we will create amazing user experiences that supercharge the entire Android ecosystem for the benefit of consumers, partners and developers. I look forward to welcoming Motorolans to our family of Googlers."

Sanjay Jha, CEO of Motorola Mobility, said, "This transaction offers significant value for Motorola Mobility's stockholders and provides compelling new opportunities for our employees, customers, and partners around the world. We have shared a productive partnership with Google to advance the Android platform, and now through this combination we will be able to do even more to innovate and deliver outstanding mobility solutions across our mobile devices and home businesses."

Andy Rubin, Senior Vice President of Mobile at Google, said, "We expect that this combination will enable us to break new ground for the Android ecosystem. However, our vision for Android is unchanged and Google remains firmly committed to Android as an open platform and a vibrant open source community. We will continue to work with all of our valued Android partners to develop and distribute innovative Android-powered devices."

The transaction is subject to customary closing conditions, including the receipt of regulatory approvals in the US, the European Union and other jurisdictions, and the approval of Motorola Mobility's stockholders. The transaction is expected to close by the end of 2011 or early 2012.

Imagine if Microsoft (NASDAQ:MSFT) started competing with Dell (NASDAQ:DELL), and Hewlett Packard (NYSE:HPQ).

One of the biggest beneficiaries of this announcement will be Microsoft. Microsoft has stepped up its battle for the smartphone market with the release of Mango update for its Windows Phone operating system. In view of Google buying Motorola, Mango is likely to gain some traction. However, Microsoft's close relationship with Nokia (NYSE:NOK) may cause other smart phone vendors to hesitate. If Nokia can get its act together, Nokia will also benefit.

An indirect beneficiary will be the chip maker Nvidia (NASDAQ:NVDA). Nvidia supplies chips to Motorola.

This announcement may be a life line for Research In Motion (RIMM). Now a window is open for an Asian company to buy RIMM. In the alternate, RIMM can make its operating system open and start licensing it to other vendors.

It goes without saying that the biggest beneficiary will be Apple (NASDAQ:AAPL).

On the losing side, expect the biggest loser to be Interdigital (NASDAQ:IDCC). There has been a lot of speculation that Google will buy this company for its patents.

Also expect Google to trade down.

I may also provide additional insights on my blog

Disclosure: I am long AAPL from $131. Update: I am short IDCC from $66.03 and have signaled subscribers to short sell as well.