Google Inc (GOOG): Handset Exit Should Strengthen Android


Jefferies Equity Research analysts Brian Pitz, Brian Fitzgerald and Peter Misek rate Google Inc (NASDAQ:GOOG) as a Buy as the tech giant maintains ownership of Motorola’s deep patent portfolio after sales to Lenovo Group Limited (ADR) (OTCMKTS:LNVGY) (HKG:0992).

Key takeaway from Google’s Motorola sale

We like the deal and the price looks fair to us. Overall, Google Inc (NASDAQ:GOOG)’s exit from the handset business should strengthen Android by reducing the risk that handset makers will deploy competitive operating systems. With Android in the lead position for the foreseeable future, we think iOS can continue to focus on the mid- to high-end. Importantly, GOOG maintains ownership of (most of) Motorola’s deep patent portfolio.

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Lenovo Group Limited (ADR) (OTCMKTS:LNVGY) (HKG:0992) to acquire Motorola Mobility from Google Inc (NASDAQ:GOOG) for $2.91B total consideration, subject to certain adjustments. At closing, Lenovo will pay $660MM cash plus $750MM worth of ordinary Lenovo shares (subject to a share cap / floor). The remaining $1.5B will be paid in the form of a three-year promissory note.

Post-deal, Google Inc (NASDAQ:GOOG) will maintain ownership of the vast majority of the Motorola Mobility patent portfolio, including current patent applications and invention disclosures. These patents serve to defend both Google and its Android partners from lawsuits, and as such maintaining patent ownership is critical. We have always maintained that Google was more interested in owning Motorola’s patent portfolio than its hardware business. At the time of acquisition, Google acquired ~17K patents and ~7.5K patent applications from Motorola. Lenovo will acquire ~2K patents from Google, and has an agreement to license the patents that Google retains.

Deal should strengthen the Android ecosystem

The deal should strengthen the Android ecosystem by reducing the risk of handset makers deploying handsets with competitive operating systems. This puts Android as the leader for the foreseeable future and in our view means iOS can continue to focus on the mid- to high-end. The deal makes any move down-market by Apple Inc. (NASDAQ:AAPL) at this point tough to contemplate.

Press reports suggesting Google Inc (NASDAQ:GOOG) lost a substantial sum of money on this sale are incorrect. Remember, Google assigned a $5.5B value for Motorola’s patents, and it currently maintains that value on its balance sheet (and amortizes them through the P&L).

While the actual value of these patents may be subject to debate, the fact remains we do not anticipate any write-downs, as some have suggested. See page 20 of Google’s 10-Q dated June 30, 2012 for more details on the amount of cash and patents acquired from Motorola. Note in addition to the list below, Google Inc (NASDAQ:GOOG) also obtained about $1B worth of deferred tax assets from Motorola, although we do not include them in our list.

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