Since it was announced before the market opened on Monday August 15 there has been a great deal of speculation regarding Google’s (GOOG) acquisition of Motorola Mobility (MMI) and the ramifications of the deal. Was it all about patents? Was it about protecting the Android ecosystem? Was it an attempt to compete with Apple? Was it all of these reasons?
Somewhat lost in the discourse has been what Google will ultimately do with Motorola’s cable set box top business. The Home Segment as Motorola calls it was included with the mobile segment in the spin off to make sure that the new company had scale and some cash flow. While the mobile phone business has not been profitable the home segment generated positive operating earnings in each of the past 3 years (see Motorola Mobility 10-K Segment Information). In its 10-K MMI describes the Home segment as follows:
The Home segment is a provider of products and services to cable operators and wireline telecommunications (“telco”) service providers (collectively, “network operators”) that enable the delivery of video, voice and data services to consumers. Our product portfolio primarily includes interactive set-top boxes, end-to-end digital video and Internet Protocol Television (“IPTV”) distribution systems, broadband access infrastructure platforms, and associated data and voice customer premises equipment (“CPE”). Home net revenues represented 32% of Motorola Mobility’s combined net revenues in 2010.
If Google was really just after the patent portfolio there is a chance they will divest either or both of the mobile design and manufacturing business and the TV box-top business once the transaction has closed. It is also possible that Google wants to somehow utilize the Home segment to reengineer a Google TV product. But Google is about technology and innovation and MMI’s home segment is really a low-tech business. Said another way it’s not Tivo (TIVO).
Tivo is a technology innovator with the best interface between a television and content, both traditional cable-based content and online content. On August 1 Tivo announced the launch of the Insignia Connected TV powered by Tivo through a strategic alliance with Best Buy (BBY). The TV will combine Tivo’s user interface without an additional set-top box (press release).
As of August 15 Tivo had a market capitalization of $1.0 billion and an enterprise value of $580 million. Tivo has a net cash position of almost $500 million and recently announced a $100 million share buyback program. And, of course, like MMI, Tivo has patents that led to a $500mm settlement with Dish earlier this year. It is also important to note that Tivo has ongoing patent litigation with a number of parties included Motorola Mobility. Tivo also has $250 million of deferred tax assets that would benefit a profitable acquirer (subject to the required section 382 limitations of course).
Put bluntly Tivo is cheap and Motorola Mobility’s home segment needs a pick-me-up if it is to have real value to Google. Whether Google keeps the Home business or sells it combining with the Tivo makes perfect sense.