Google's Motorola Buyout: A Sign of Weakness?

| About: Alphabet Inc. (GOOG)

This week opened with an announcement that has taken the tech world by storm: Google (NASDAQ:GOOG) is buying Motorola (NYSE:MMI) for $12.5 billion.

This is a huge, huge move. In fact, it is hands down the most important development in the industry this entire year. Google just played a card that no one saw coming, and the full ramifications of this acquisition is something that won't be seen for quite some time.

Sure, there were rumors of Google's interest in acquiring Motorola's cell phone division that extend back as far as January of last year, but this was just idle gossip on the grapevine. No one took it any more seriously than any of the recent rumors that Google might be looking to buy Research In Motion (RIMM).

What was once just a rumor has transformed into breaking news today. At this juncture, we don't have nearly enough data to form any tangible conclusions, but my gut reaction is that this is a desperation play by Google. Google investors seem to share my ambivalence: at the time of this writing, the stock is in the red while the broader market is up.

That Google would make such a move seems odd given the explosive success the Android OS has enjoyed so far, at least on smartphones. But let's take a look at CEO Larry Page's official blog post about the acquisition that went up this morning. Filter out all the noise about how great Motorola is and how this buyout is going to "supercharge the Android ecosystem," and we find only one clue as to what drove Google's decision to buy Motorola: patent assaults by Microsoft (NASDAQ:MSFT) and Apple (NASDAQ:AAPL).

Motorola comes packaged with 17,000 issued patents, which adds a lot of ammunition to Google's patent arsenal. In truth, I believe that this acquisition is about more than just patents, because Google can build a much larger patent portfolio with $12.5 billion than what it receives by gobbling up Motorola. But Page's words show that this is, in part, a defensive move. You don't make defensive moves because you want to, you make them because you have to, because your competitors force your hand. Would Google be buying Motorola if it wasn't feeling the heat from its enemies in the mobile wars, if its partners weren't getting attacked from every angle with infringement lawsuits? Maybe, but I doubt it.

Then there's the issue of how much Google is paying to acquire its Android partner. $12.5 billion is $40/share - a full 63% premium over Motorola's Friday closing price. For an all stock purchase, this is a significantly higher premium that most companies usually pay for an acquisition. This purchase will burn up a full third of the war chest Google's assembled over the years from the profits it has generated from its core search business.

From a fundamental standpoint, the Motorola buyout still seems a great deal cheaper than the $8.5 billion Microsoft (MSFT) paid for Skype earlier this year. However, the difference between Microsoft's Skype acquisition and Google's Motorola acquisition is that with Skype, Microsoft acquired a valuable technology that it can leverage with its core products. Other than Motorola's patent package, it doesn't seem like there's anything in this deal that can add value to Google's current product line. Also, the patents themselves don't enhance value, they are necessities to ensure Android's continued survival.

There's also the extremely important question of how this move is going to affect Google's other Android licensees, like Samsung (OTC:SSNLF) and HTC (OTC:HTCXF). On today's conference call about the acquisition, Page and his team assured analysts that they've spoken to their top five Android partners before making this announcement, and all were "enthusiastic" about it. They didn't give any more detail on this, even when pressed by analysts, and I'm not sure I buy it.

If you were an Android licensee and you see Google getting into bed with one of your biggest competitors, would you be enthusiastic about it?

Sure, Google's partners benefit indirectly from the vast legal resources Google will gain access to through Motorola's patent portfolio, resources that Google will no doubt utilize to assist them in their own legal battles. But they would probably much prefer it if Google just purchased Motorola's patents directly like the transaction it made with IBM (NYSE:IBM) instead of acquiring the entire company outright. With Motorola under its wing, Google now has a dog in this fight. Despite the company's famous "do no evil" motto, I have serious doubts about whether or not it can retain its neutrality, doubts that are likely shared by Google's licensing partners.

Whether or not this move will benefit Google in the long run remains to be seen, but it is almost definitely going to benefit Google's competitors. Many OEMs who were formerly loyal to Android may defect to Microsoft's Windows Phone OS. You may have to pay a fee when you license with Microsoft, but at least you know you'll be getting the same package your competitors are. Apple's (AAPL) strategy to create the whole widget in-house just got vindicated by Google's copycat venture into hardware. Not everyone is a winner though. Wireless patent developer InterDigital (NASDAQ:IDCC) saw its stock take a 16% plunge in the pre-market after this news broke. InterDigital's stock had run up recently on speculations of a potential takeover bid by Google, but with Motorola's portfolio in its arsenal, investors realized that Google doesn't need InterDigital quite as much anymore.

Make no mistake: Google's acquisition of Motorola is a game changing move with massive ripple effects that'll reshape the entire landscape of the mobile computing industry. Some will win, others will lose, but when the dust settles, things aren't going to be the same ever again. The mobile wars are just beginning, and the ultimate victors are far from decided. Google has made a very bold play here. Whether or not it's also a smart play remains to be seen, but I, for one, will be sitting tight to see how the rest of this story unfolds in the days to come.

Disclosure: I am long AAPL.