Google (GOOG) to acquire Motorola – Investment Analysis
Google announced an agreement to acquire Motorola Solutions (MMI) as it continues a push into mobile internet and mobile hardware. The deal was announced for $12.5B and shareholders of Motorola Solutions will receive $40 per share in cash. This is a cool 63.5% for shareholders of MMI relative to Friday’s closing prices. Larry Page and Patrick Pichette (Google’s CFO) did a quick conference call explaining the deal this morning. You can listen to the call over at Google’s investor relations site. The call didn’t say too much other than point out that the deal will be accretive (ex amortization of intangibles) immediately from the time it closes. This is because Google is funding the transaction with excess cash sitting on the balance sheet earning very low yields. For perspective, Google has over $40B on the balance sheet (Q2 11) in cash, short-term investments, and equity securities. Google just committed to spending 31% of its cash to buy Motorola. Moreover, Google has been generating over $13B in operating cash flow at an annual rate (the amount they have generated the past 4 quarters). CJF estimates that Google will generate over $10B in cash on an annual basis – an amount expected to grow over time at Google’s high growth rate.
Shares of GOOG look set to open down 14 points or so (or about 2.3%) at the open. The deal with Motorola has nothing to do with Motorola’s handset business – the purpose of the deal is to buy patents in order to protect and defend the Android platform against Apple and potentially Microsoft. Android has been “on fire” and is now the fastest growing smart phone OS, with industry leading market share. As of Q2, 250,000 Android Apps had been created, 6 billion Android Apps have been downloaded, and 550,000 Android devices were being activated per day. Given the recent scrutiny that Google has received from the Department of Justice related to anti-competitive practices and Android legal issues – we see this deal as a defensive measure to acquire patents and help protect the valuable Android platform.
We believe any material pullback in Google’s shares represents an opportunity to build a position and we will lay out some of the more detailed business drivers relating to on-line advertising revenues in the future. Google is the best positioned company in the world to benefit from the growth of the internet economy, and Google is set up to earn over $41 in EPS on a GAAP basis next year ($46 in EPS on a pro-forma basis). Google shares offer value for GARP investors.
IDCC still in play?
Tough to handicap at this price. A lot of the run from $40 to $75 was direct speculation (which turned into expectation) that Google would buy. Google is likely off the table with another deal this size, but the entire patent portfolio’s of some former giants are likely being scrutinized and will potentially be acquired by the likes of Google, Apple, Microsoft and others in the future. To find “the next” target i would look amongst IDCC, NOK, RIMM, SNDK, CIEN
Good article, Cracker. I do love my Android phone, but the battery life SUCKS. They should figure that out.
I still think it is in play. Wish I would have loaded up at $59.