What If Google Faked Left On Nortel To Go Right On Motorola?

Aug. 31, 2011 3:41 PM ETGOOG13 Comments

What follows is entirely speculation. Informed speculation, but speculation all the same. But what if Google (GOOG) never had any intention of trying to buy the Nortel patent stash and was always really interested in Motorola Mobility (MMI)?

Let me put together a few points, all of which start with this report at Reuters:

"The tax benefits of the deal make what was a good deal into a great deal," said Robert Willens, a New York accounting and tax expert. He estimated that through the acquisition, Google can expect to reap $700 million a year in tax deductions from future profits each year through 2019. Google also will be able to immediately reduce its taxes by $1 billion due to Motorola Mobility's U.S. net operating loss, and by a further $700 million due to its foreign operating loss, he said.

What follows depends upon our man there being correct. As I add up what he says, those tax losses from the acquisition add up to some $8.7 billion off Google's tax bill in the years to come. This makes the cost of the acquisition itself, of the handset maker and patent stash, $3.8 billion.

You are allowed to utilize the tax losses of a company which you purchase: but you're not allowed to go and buy a company just to utilize the tax losses. The IRS says so. So, if we were to imbue Google with Machiavellian cunning (GOOG's reputed to have pretty bright guys, after all), then before purchasing such a large cash value of tax losses GOOG would establish that GOOG was absolutely in the market for something else that comes with the deal. Thus, bid on the Nortel patents to establish that it's that patent stack which is being sought.

By being in the bidding for the Nortel pieces, Google will of course push up the price to the company's competitors: Apple (AAPL), Microsoft (MSFT), Research In Motion (RIMM), etc. have to pay more than they otherwise would for what they get.

Once everyone else has made their moves and committed their cash, Google then goes off and buys what it wanted all along, Motorola Mobility. There's no great competition because the others are already replete. And after the effect of the accumulated losses on future tax bills, the price for a handset maker and a whacking great stack of patents is less than the competitors have just paid for patents alone. And the IRS is onside.

Note that quite a few people weren't all that sure that Google was being serious in GOOG's Nortel bids, what with bidding Pi, or $3.142 billion at one point and all that. Also note that, as a Canadian company in the equivalent of Chapter 7 bankruptcy, with Nortel there were no attractive tax losses which a US-based company could use.

As I say, this is pure speculation. But wouldn't it be a great deal to get your competitors to commit where you don't want to be, get them to overpay and allow you to possibly underpay, make use of gargantuan tax losses and get a handset maker and a patent stack for less than you'd have to pay for patents alone?

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

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Tim Worstall is a wholesaler of rare earth metals and one of the global experts in the metal scandium. He is also a Fellow at the Adam Smith Inst in London and an writer for a number of media outlets, including The Times (London), Telegraph, The Register and even, very occasionally indeed, for the WSJ. This account is linked with that of Mohamad Machine-Chian: https://seekingalpha.com/user/52914142/comments

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