Google Merger with Motorola - Essay Example

Google Merger with Motorola Contents Introduction 3 Background of the Companies 4 Motives behind Merger 5 Analysis of the Deal 6 Conclusion 8 References 9 10 Bibliography 11 Introduction In August 2013, Google Inc. made a surprise announce that it plans to buy Motorola Mobility for whooping $12.5 billion. Motorola has recently been entirely focusing in its Android business and while many viewed the deal as gateway for Google into smart phone segment, but more importantly the deal was aimed by Google to its hand on some important and much required patents that Motorola holds. (Source: onbile.com, 2013) Google expects to turn its recently acquired Motorola business into profitable unit by focusing on high-end (in all probability high margins) products including tablets and smart phones. There are also high chances that some portions of business and obviously some workforce could be laid off because Google of cost cutting measures. Many analysts believe that if Google can sell Motorola’s home division, either in part or as whole, then the revenues realised from the deal could easily infuse necessary cash into Motorola’s handset division and give a chance to turn around (Pcmag.com, 2012). The merger and acquisition was strategic from the point of view of Google as post merger Motorola will still be operating independently and that the deal will strengthen the existing patent portfolio of Google. Google was also suffering losses from numerous lawsuits related to patent infringements between its vendors and the likes of companies including Oracle Corporation, Apple Inc. and Microsoft. Hence, the deal is expected defend its expanded portfolio and viability of its Android operating system. Background of the Companies Google Inc is mainly famous for its pioneering search technologies that it uses to connect billions of people around the world. The company was founded in the year 1998 by Larry Page and Sergey Brin, who holds PhD from Stanford. It is headquartered in Silicon Valley but its offices are spread across Europe, America and Asia. In the world of 21st century Google has earned the trophy of top web property in all major global markets. Google’s advertising segment are targeted to all types and size of businesses with quantifiable results. The company provides its users/customers enhancing web experience. Motorola Mobility is a multinational publicly traded telecommunications equipments corporation that is headquartered in Chicago, Illinois, United States. The company has huge contributions revolutionising the mobile phone industry through innovation and holds a cumulative track record of pioneering mobile handset business for over 80 years. At the time of merger and acquisition, Motorola Mobility was the owner of 17,000 patents, out of which about 7000 patents were pending but applications are filed. Motorola Mobility announced that its shareholders are in favour of the merger and consensually voted for the deal that will infuse $12.5 billion liquidity into its loss making businesses. The deal was also cleared by the European Union and the United States Department of Justice. The deal also received necessary approvals from Chinese authorities. Motives behind Merger The various factors that motivate mergers and acquisitions are discussed as follows: Synergy – In 2004, Bruner argued and said that synergy means co-operate or work together and involves in merger when two organizations come together and pool in their resources and expertise for better performance. The effect of synergy is considered to be important because merger means value creation, investors’ reaction to merger is an important consideration, Managers effective estimation and knowledge is important for the benefit of investors, and for the development of post-merger integration strategies synergy is important (Bruner, 2004). Tax Advantage – Mergers and acquisitions benefit the organizations by reducing their tax payments. It is often noticed that larger profitable organizations merge with loss making companies so as to take the advantage of reduced expenses due to reduction in taxation. As stated by Auerbach in 1988, loss making corporations on their decision to combine with fully taxable firms can increase the value of their own tax benefits. The shareholders of acquired companies also receive tax benefits when the company merges with a large corporation (Auerbach, 1988, pp.158-164). Improved Market Standing – In the year 2005, American Bar association stated that market power is the capability of an organization to charge prices for their product and services including profit for a continued period of time above the competitive level (American Bar association, 2005, p.64). Analysis of the Deal The $12.5 billion deal merger of Motorola Mobility into Google is by the largest acquisition by Google which many analysts also believe to be a controversial one. By acquiring Motorola Mobility Google has basically put itself in the Android market where it already has many Android hardware partners like HTC, Acer, and Samsung. However, the contract of the deal was so prepared that it will not give any special favours to Motorola. The filing of Merger deal under Securities and Exchange Commission reveals that the deal mainly focused the acquisition of Motorola Mobility’s patents portfolio rather than getting into profitable handset business. A careful analysis reveals that Google actually wanted to make it difficult for its rivals, Microsoft or Apple, to claim the intellectual property rights of Android (SEC, 2011). In July, 2013, Google posted its first quarterly revenues report that included notes of Motorola Mobility acquisition. The market was surprised to find that Google’s overall numbers were surprisingly better than expected. The company booked cumulative total revenues over $12 billion for the quarter, which increased by 21 percent compared to same quarters during previous year. On the other hand, the financial statements of Motorola show that it lost money in 14 out of 16 previous quarters during 2012 to 2013. This was the main reason for the analysts and brokers to believe that its quarterly earnings announcement will be lower after the merger since the losses of Motorola will be absorbed by Google. Further, about 10.41 percent (or $1.25 billion) of Google’s quarterly revenues came from Motorola out of which approximately $840 million was generated from Motorola handset business. This means that had Motorola Mobility still be operating as separate business entity, then it would have booked losses of around $38 million during same period. In August 2013, Google announced that it will lay off nearly 4000 employees from Motorola Mobility that makes up around 20 percent of Motorola’s former human resource. Google also said that it will also hive-off a third of Motorola Mobility offices outside US. These initiatives are in line with the earlier forecast made by Google to cut cost by $275 million in the current fiscal. The company also stated that the act of the merger along with layoffs and removal of non-profitable business are expected to impact the earnings of Google in the third quarter of 2013. The company has mentioned in its filing with US SEC that it will spend about $90 million while closing non-profitable offices. It has further mentioned that most of these closures will occur in India and Asia. Regarding the restructuring after the merger, Google has stated that it has underestimated the cost of employee layoffs in Motorola Mobility and also the closing down of non-profitable business units by about 25 percent. Google was also expecting the cost of restructuring to consume about a third of Motorola’s revenues which was a big concern given that Motorola was already operating in loss pre-merger. Post merger Motorola Mobility’s, Dennis Woodside replaced Sanjay Jha as the chief executive officer. While Jha was CEO of Motorola Mobility pre-merger, Woodside was a former senior vice president at Google (BBC, 2012). Motorola held a portfolio of 17,000 patents that are directly applicable to mobile and telecommunication technologies. Google had suffered huge loss in the intellectual property assets just before the merger with Motorola where about 6000 patents that Google held through its portfolio belonging to Nortel, was lost as the entity filed bankruptcy. The setback was that a consortium constituting Google’s key rivals namely, Apple, Microsoft, RIM, and Sony bought out these patents for about $4.5 billion. Google feared that such loss in the IP rights could result into major hurdles for the business in future. Given that Androids, smart phones and tablets are becoming the emerging trends in this decade, leaving behind the popularity of desktop computers or laptops, Google realised that the innovative patents of Android is also exposed to rivals like Microsoft and Apple (Digtaltrends.com, 2012). The management of Google thought before the deal that if it can fill its pockets with a rich portfolio of patents then it will be in a far better position in the market compared to its rivals. It will also help the company to foster growth in Android market segment (Bloomberg, 2011). Conclusion The merger between Google and Motorola is strategic since Google’s strength its software and Motorola’s strength lies in developing innovative mobile devices. Motorola has a long history of developing intellectual property with innovation and rich experience of over 80 years in mobile hardware industry. In 2008, Motorola decided to use Android as the operating system for all their smart phone devices. This will extend the existing patent portfolio of Google in Android segment giving an edge over its rivals. As Motorola would continue to operate independently, together both the companies will be able to accelerate innovation in mobile computing. The synergies created post-merger are expected to be passed onto their customers who are now expecting better smart phones at lower prices (Google, No date). References American bar Association, 2005. The Market Power Handbook Competition Law and Economic Foundations. USA: ABA Publishing. Auerbach, A. J., 1988. Corporate Takeovers: Causes and Consequences. USA: The University of Chicago Press. BBC, 2012. Google Completes purchase of Motorola Mobility. [Online]. Available at: http://www.bbc.co.uk/news/business-18164190. [Accessed on February 08, 2014]. Bloomberg, 2011. Google to Buy Motorola Mobility for $12.5 billion to Gin Wireless Patents. [Online]. Available at: http://www.bloomberg.com/news/2011-08-15/google-agrees-to-acquisition-of-motorola-mobility-for-about-12-5-billion.html. [Accessed on February 08, 2014]. Bruner, R.F., 2004. Applied Mergers & Acquisitions. New Jersey: John Wiley and Sons. Digtaltrends.com, 2012. Is Google’s Acquisition of Motorola Working out?. [Online]. Available at: http://www.digitaltrends.com/mobile/is-googles-acquisition-of-motorola-working-out/. [Accessed on February 08, 2014]. Google, No Date. Facts about Google’s Acquisition of Motorola. [Online]. Available at: http://www.google.com/press/motorola/. [Accessed on February 08, 2014]. Onbile.com, 2013. US Android Market Share. [Online]. Available at: http://www.onbile.com/info/us-android-market-share/. [Accessed on February 08, 2014]. Pcmag.com, 2012. Google Officially Completes Motorola Mobility Acquisition. [Online]. Available at: http://www.pcmag.com/article2/0,2817,2404719,00.asp. [Accessed on February 08, 2014]. SEC, 2011. AGREEMENT AND PLAN OF MERGER. [Online]. Available at: http://www.sec.gov/Archives/edgar/data/1495569/000119312511225807/dex21.htm. [Accessed on February 08, 2014]. SEC, 2011. PRELIMINARY SPECIAL PROXY STATEMENT. [Online]. Available at: http://www.sec.gov/Archives/edgar/data/1495569/000119312511246952/d224940dprem14a.htm [Accessed on February 08, 2014]. Bibliography American bar Association, 2005. The Market Power Handbook Competition Law and Economic Foundations. USA: ABA Publishing. Auerbach, A.J., 1988. Corporate Takeovers: Causes and Consequences. 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