Google's $12 Billion Motorola Gamble: The Reasons Why It Will Pay Off

| About: Alphabet Inc. (GOOG)

The purchase of Motorola Mobility (NYSE:MMI) by Google (NASDAQ:GOOG) is finally official with Google officially announcing the completed acquisition yesterday, May 22. The purchase - announced in August 2011 - took Saturday to receive all of the necessary approvals. Now the big question is what will Google do with a tech hardware company and can it be successful?

You will find a lot of written opinions on whether or not the purchase is a good deal for Google. I want to discuss some different aspects of Google and its move into the hardware business.

Google is a tremendously profitable business. In 2011, the company generated net profit of almost $10 billion on $38 billion worth of revenue. Over the last three years - including recession marred 2009 - Google's sales increased by 72% and profits more than doubled. However, the company's revenues are primarily online advertising from - 69% - and websites using the Google ads system - 27%. It is apparent the company would like to diversify into some other businesses for additional revenue streams and growth potential.

To date Google has failed to compete with Facebook (NASDAQ:FB) in the social network space. Google Buzz was a complete failure and I recently saw the current attempt at social - Google+ referred to as a "ghost town". Although social networking is viewed as the next big online market, Google has not been able to put together a product or group of products to tap into social.

One success story for Google has been the Android operating system - OS. In smartphone sales, Android phones are capturing about 60% of the business to about 30% to the Apple (NASDAQ:AAPL) iPhone. However, tablet computers running Android have not made much of a dent in the iPad dominance. The purchase of Motorola Mobility puts Google in more of a head-to-head competition with Apple. The deal provides an opportunity to further profit from the Android dominance in smartphones and to build market share in tablets

Potential for Success

There is one news item which caught my eye that gives an indication that the Motorola acquisition may turn out to be a profitable success. Google has named a new CEO of Motorola Mobility with Dennis Woodside replacing existing CEO, Sanjay Jha. An article on Slashgear reports that Woodside was about to be poached by Apple CEO Tim Cook when Google offered him the Motorola top job. A top boss coveted by Apple may be just the guy to compete with Apple.

Finally, I give Google kudos for taking a risk and spending a pile of money in an attempt to expand and grow the business. Over the past year I have reviewed the finances and operations of 100's of companies and 9 out of 10 - or more - are opting to use share buy-backs as a way to make the finances look better and not try to find new paths for growth. I hope the Motorola+Google combo is hugely successful and generates even more profits for Google.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.