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Google Buys Motorola Mobility: Is it About More than Just Patents?

By Jim Fink on August 16, 2011

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Options let me make money on stocks even when they don’t go up.

Jim Fink — Options for Income

Yesterday (Aug. 15th), Google (NasdaqGS: GOOG) announced that it was acquiring Droid smartphone manufacturer Motorola Motility (NYSE: MMI) for $12.5 billion in cash, or $40 per share. The price was a huge 63% premium to Motorola’s closing price the day before the announcement. Why would Google pay so much? According to Google co-founder and CEO Larry Page, the acquisition of Motorola has to do with intellectual property and the avoidance of costly and distracting patent infringement lawsuits:

Our acquisition of Motorola will increase competition by strengthening Google’s patent portfolio, which will enable us to better protect Android from anti-competitive threats from Microsoft, Apple and other companies.

Motorola owns 17,500 patents and has filed for 7,500 more, so it offers tremendous value to patent-poor Google, which has been sued by several companies, including both Oracle (NasdaqGS: ORCL) and Microsoft (NasdaqGS: MSFT), on account of its Android mobile operating system. Apple (NasdaqGS: AAPL) has sued Google smartphone partner HTC and “patent troll”Lodsys is also wreaking havoc among Google affiliates. In Motorola’s recent second-quarter conference call, CEO Sanjay Jha described his company’s patent portfolio this way:

We own one of the strongest and most respected patent portfolios in the industry. We have over 17,000 patents granted and over 7,000 patents pending with particular strength in 2G and 3G essential, non-essential patents important to the delivery of competitive products in the marketplace, video particularly compression, decompression and security technologies and finally, a leading position in 4G LTE essential.

With new entrants to the mobile space resulting from the convergence of mobility, media, computing and the internet, our patent portfolio is increasingly important.

Even accounting for some CEO bluster, I’m impressed! Google investors, however, appeared to be nonplussed by the planned Motorola acquisition, sending Google shares down on the day. Perhaps investors thought Google was overpaying for Motorola at $700,000 per patent or perhaps they were still reeling from last week’s news that Google is getting anti-trust heat from the U.S. Federal Trade Commission over tying arrangements between its dominant Internet search franchise and Android-powered smartphones. Near-monopolists have a tough life!

Other Companies with Communications Patents React Differently to the Motorola Acquisition

Last month in an article entitled 3 Stock Sizzlers, I discussed the meteoric 65%-plus price rise of InterDigital (NasdaqGS: IDCC) — another patent-rich communications company – and speculated that the most likely acquirer would be Google. Well, you can kiss that speculation goodbye and InterDigital’s stock fell hard on the Motorola news, dropping more than 22% intraday. Fewer suitors may mean that InterDigital will get a lower price for its patents.

In contrast, other patent-rich communications companies like Nokia (NYSE: NOK) and Research in Motion (NasdaqGS: RIMM) received a boost from yesterday’s Motorola news because their stocks had not – unlike InterDigital –already jumped on patent-acquisition speculation. Revaluing Nokia and RIM’s patent portfolios at $700,000 per patent makes these companies appear much more valuable than they did a few days ago.

Apple is Also on the Patent Acquisition Warpath

There’s even speculation that Apple might respond to Google’s Motorola acquisition by acquiring Nokia, InterDigital, and/or RIM. Apple’s interest in patents is just as intense as Google’s, having itself been sued by Nokia for patent infringement that ended with Apple agreeing to pay Nokia licensing fees. Just six weeks ago, Apple participated in a consortium to purchase bankrupt Nortel Networks’ 6,000 patent portfolio for $4.5 billion. Heaven knows, Apple could afford more acquisitions with $28.4 billion in cash on the books and the second-largest market capitalization of any U.S. company at $350 billion.

Does Google Want to Compete Against Its Smartphone Partners?

A question remains whether Google is acquiring Motorola simply for its patent portfolio or because it wants to become an integrated hardware/software smartphone company like Apple. Initially at least, Google insists that it just wants to avoid patent litigation over Android and help its hardware smartphone partners do the same. But some industry analysts are skeptical. For example, one ComputerWorld columnist wrote:

No one sane will spend $12.5 billion (the equivalent of the entire UK economic aid package to developing countries in 2008) on something if they don’t intend making full use of it.

Surely this means it is logical to expect Android development in future will move to offer better support for Motorola-made devices, even if only on a component level. Being part of Google’s family is bound to give Motorola certain advantages.

Similarly, a Morgan Keenan equity analyst wrote:

Google can’t admit in public that what they intend to do is eventually make Android proprietary. If this deal was just about patents, Google would have bought IDCC.

Intriguing speculation to be sure, but I think Google would be nuts to make Android proprietary. Just look at how a closed-system mentality hurt Apple in personal computers. By keeping Android open to all hardware manufacturers, Google will ensure that Android remains the world leader in smartphones just like Microsoft is the world-leader in PCs.

As an aside, superstar investor George Soros must be kicking himself for having bought a large stake in Motorola Solutions (NYSE: MSI) rather than Motorola Mobility!

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Stock owners in Motorola Mobility got lucky with Google’s takeover offer at a 63% premium, but 63% gains are routine for option traders. Buying options instead of stock provides tremendous leverage that can turn mundane stock moves into steroid-enhanced homerun trades. In fact, option traders can make double-digit profits even when a stock declines in value, something most stocks not involved in a takeover have experienced all too often lately.

For example, in Options for Income, my new option trading service, on June 2nd I recommended selling put options that expired in July on biotech company United Therapeutics (NasdaqGS: UTHR). The stock didn’t go up and even declined about 10% by July expiration, but my subscribers still pocketed a 26% profit in less than two months!

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