Yesterday morning before the start of trading in New York, Google and Motorola Mobility jointly announced an agreement for GOOG to acquire MMI for $40 a share in cash, or about $12.5 billion. The takeover price represents a 63% premium over MMI’s closing quote last Friday. The parties have also agreed to a breakup fee of $2.5 billion, or 20% of the deal price (an unusually large amount)–and that MMI will operate as a separate division of GOOG. The deal is expected to close late this year or early next.
MMI ended Monday trading at $38.12 a share, a price that I think signals two Wall Street’s beliefs: that the acquisition is highly likely to occur, and that a rival bidder is probably not going to emerge. That’s my take as well.
MMI has three main assets: by far the largest is its massive collection of cellphone-related patents; it also has a set-top box business; and it makes handsets.
why the acquisition?
Look no farther than the competitive situation in the global smartphone market.
In the early stage of any market, the field is wide open. Entrants focus on building their own market share and ignore everything else. With smartphones, we’re long past this stage.
As the market matures, the competitive field separates into frontrunners, and also-rans. Typically, the stronger entrants turn on the smaller, weaker competitors–who fall by the wayside, one by one. Think NOK and RIMM as being on the losing end.
A further sign of maturity is when the top dogs–in this case, AAPL and GOOG–turn on one another as the only additional sources to fuel further growth. This phase comes last because the market leaders are typically the most difficult and expensive to wrest customers from.
That last stage is where we are now.
According to ComScore, the Android operating system extended its market share lead in the US during the three months ending June 2011 by 5.4 percentage points from 34.7% to 40.1%. During the same period, the iPhone added 1.1 percentage point of share, from 25.5% to 26.6%. The overall situation: APPL is losing ground to Android, picking up a decreasing share of the customers being shed by RIMM and MSFT (NOK has almost none left to take).
AAPL is fighting with patents
Several reasons for this:
–smartphones are by far AAPL’s largest business, so growth here is important,
–APPL doesn’t want to introduce lower-priced handsets to compete with GOOG’s mid-market offerings, and
–its lack of patents is a potentially severe point of weakness for GOOG.
last week’s EU tablet decision is a case in point
The details can be found in the blog Foss Patents, but the bottom line is that Samsung’s 10.1″ Galaxy Tab has been banned for now from sale in the EU, ex the Netherlands. What’s interesting is that the design drawings on which the ruling are apparently based are very generic (look at pp.3-4). They look kind of like Etch-a-Sketch screens and boxes without the knobs. In fact, a ZD Net article suggests that the iPad itself isn’t an original idea–it looks amazingly like the prop tablets actors used on Star Trek.
In any event, last week’s ruling suggests that patent litigation can be unpredictable. It can also have potentially disastrous consequences for the loser.
better safe than sorry
$12.5 billion is about what GOOG generates in cash flow during one year. It’s also a bit less than a third of the cash the company has on the balance sheet. The fact that this money is earning very close to zero is a key reason why the acquisition of MMI will likely be “mildly accretive” to earnings from day one.
So the cash is not a real issue, particularly since control of the mobile user is so key to GOOG’s–and APPL’s–future.