Google's Purchase and What It Means for Other Companies

by: Brian Nichols

Google (NASDAQ:GOOG) bought Motorola Mobility Holdings (NYSE:MMI) which sent off a chain reaction of rumors, speculation, and price action within the market.

Google purchased Motorola Mobility for $12.5 billion which is expected to close by the end of 2011 or the beginning of 2012. This acquisition is the largest yet for technology giant Google. Investors had been speculating on the potential future of the Android market as lawsuits continue to pop up and Google had very few patents in comparison to its counterpart Apple (NASDAQ:AAPL). This acquisition gives Google a better playing field in long term success with the Android operating system, and could open many doors for other companies.

Investors can speculate that Google bought Motorola Mobility for two reasons.

  1. Up until this point Google had the least number of patents among its competitors with an estimated 600. Motorola Mobility holds an estimated 17,000 patents, more than 28x the number of Google. With this acquisition Google can now assist handset manufacturers who have recently seen many lawsuits while using the Android operating system. Apple has claimed that many of these companies, such as HTC Corporation (OTC:HTCXF), has violated its patents.
  2. Motorola Mobility has several handset products which now means Google has a handset manufacturer to better compete with Apple.

I anticipate more news, rumors, and speculation during the coming weeks, but until then we can only speculate for ourselves. I believe this $12.5 billion investment on behalf of Google will prove to be relatively cheap in terms of long term success. Several companies experienced gains after Google announced its new acquisition, with Nokia and Research in Motion seeing the most.

Nokia Corporation (NYSE:NOK) witnessed its stock price rise 17.35% after the acquisition was made public. This could very well be relevant news to Nokia as investors hope the acquisition will result in Microsoft (NASDAQ:MSFT), Apple and even Google making an offer to purchase the company for its large patent portfolio. It makes sense, Nokia has just as many patents, and investors would probably agree that Nokia's patents are just as if not more valuable. However, I do not believe Nokia will be purchased from one of the big three companies for several reasons.

Nokia has formed a strategic partnership with Microsoft and I believe Microsoft would stand the best chance of purchasing the company. The fact that Microsoft has not acquired the company to this point makes me believe the company will not. Nokia has too many questions and not enough answers for a company such as Microsoft. The business is declining and while Nokia has patents that Microsoft could use I believe Microsoft is innovative enough to where the company does not see the value in what it would have to pay to purchase the company. Nokia has a market cap of nearly $24 billion and I would imagine the company would want at least $30 billion for purchase and it's hard to see the value at this point.

For Google the purchase of Motorola Mobility made sense. The company has been trying to accumulate patents to assist the android operating system. The company came close in purchasing the assets from the bankrupt Nortel but fell short. The MMI purchase accomplished this objective plus gives Google the luxury of handsets to manufacture its own devices without relying on other companies such as HTC Corporation. The MMI acquisition is brilliant, and I believe will open up many doors for long term success with the Android system in addition it could affect other areas of business as well.

Google had only 600 patents compared to Apple's 4,000 patents which put the company at a long term disadvantage. Google had to acquire a company such as Motorola Mobility to consistently remain relevant and expand in operations. As for Nokia, I just do not see benefits such as this for Microsoft, who has over 17,000 patents, and it's the only company I would give a legitimate chance in purchasing Nokia. Google's acquisition created a lot of speculation but I believe it will remain speculation as no other company needs Nokia in order to move forward.

Research in Motion (RIMM) is another company who saw large gains for the same reasons as Nokia. Unfortunately, I see RIMM in a very similar situation as a company with a dying product with lots of patents. Unlike Nokia, I cannot name one company who would purchase this company.

I will say that of the two companies I believe Research in Motion is more appealing at this time. The company has tons of assets, money in the bank, and no debt which could potentially make the company attractive. The company has a market cap of $14.20 billion with a price to earnings under 4.50 therefore I could see the company asking for a much higher premium in comparison to Nokia. It is difficult to predict Research in Motion over the next few years and its level of success. The company recently released its new handset products and is planning on utilizing the technology in the playbook very soon within its handset devices. I believe the company's downfall came as a result of not getting products into the market quick enough to capitalize on demand. The playbook was one of the last tabs on the market when it should have been the first or second. Nokia's problem is its failure to evolve with time and develop a device that competes with HTC or Apple. Both companies have been on the top and could easily reach the level again. However both companies have much work to be done and would probably ask too much for purchase. I will be interested to see what the next five years will bring for these companies as the best in technology is always one transcendent product away from greatness.

I do not foresee a major acquisition by Apple, Microsoft, or another from Google. Nor do I anticipate other companies purchasing Nokia or Research in Motion in the near future. Google's acquisition was simply the company's way of "catching up" to the competition on a long term basis while ensuring its ability to remain adequate within the industry. As I said, I will be interested to see how the next five years play out. A device that transforms the technology industry could easily come from any of the companies in which I have mentioned. It will be ironic if the company who produces "the next big thing" is Nokia or Research in Motion and we as investors look back on this speculation knowing that Microsoft, Apple, or Google could have easily purchased the company.

Disclosure: I am long GOOG.