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Last updated: August 16, 2011 12:38 am
Google has outlined its largest and boldest acquisition yet with the agreement to pay $12.5bn in cash for Motorola Mobility, the US smartphone company, in a deal that escalates the search company’s rivalry with Apple and gives it control over more wireless patents.
Google will also gain a new and valuable channel into the living room through Motorola Mobility’s profitable set-top box business which makes receivers for cable TV operators.
The deal will see Google pay $40 per share for Motorola Mobility – a 63 per cent premium to the company’s closing share price on Friday – and gain the $3bn of cash sitting on Motorola’s books. Google had $36bn in cash on its balance sheet at the end of June.
The acquisition, expected to close by the end of the year or in early 2012, will put Google and Apple head-to-head in the battle for dominance in the fast-growing smartphone market, as both companies will control the hardware and software of their products.
But the deal also gives Google direct access to Motorola Mobility’s portfolio of more than 17,000 patents and 7,500 pending patents, ammunition Google believes it needs to repel a patent assault by Apple, Microsoft, Oracle and others on its Android mobile phone operating system.
Larry Page, the Google co-founder who took over as Google’s chief executive in April, said the deal would “supercharge the entire Android ecosystem for the benefit of consumers, partners and developers”.
FT reporters in London, New York and San Francisco look at the implications of the acquisition
The operating system, licensed for free to mobile phone handset makers, has surged in popularity since the first Android phone was launched in 2008. It claimed 48 per cent per cent of the global smartphone market in the latest quarter, according to Canalys, a market research firm, well ahead of rivals including Nokia, Apple and Research in Motion.
But acquiring a handset manufacturer will put Google into direct competition with many of the companies that rely on Android to power their own smartphones, including Samsung and HTC.
Andy Rubin, senior vice-president of mobile at Google, said: “Google remains firmly committed to Android as an open platform and a vibrant open source community. We will continue to work with all of our valued Android partners to develop and distribute innovative Android-powered devices.”
The potential value of Motorola’s patent portfolio was highlighted last month by Carl Icahn, the billionaire Wall Street investor and Motorola Mobility’s largest single investor, who called on management to “consider its options” for maximising the value of its patents.
Google was recently outbid by a consortium led by Apple which paid $4.5bn for 6,000 wireless patents owned by Nortel Networks, the defunct Canadian telecommunications equipment maker – a deal that helped highlight the value of intellectual property in the mobile phone industry, which has been rocked by a series of patent infringement suits, many filed by Apple.
Motorola Mobility was demerged from Motorola this year after the handset maker was left behind in the touchscreen smartphone revolution ushered in by Apple’s iPhone in 2007.
Shares in Motorola Mobility, advised by Qatalyst and Centerview, closed up 56 per cent. Google, advised by Lazard, saw its stock fall 1.2 per cent.
Motorola Mobility’s handset business ran into severe difficulties about five years ago after missing the trend towards touchscreen smartphones and the use of third-generation wireless technology, which enables web surfing on mobiles.
The business ran up large losses, but the turnround plan led by Sanjay Jha, chief executive since 2008, has made significant strides. The company reported an operating profit of $76m in 2010, compared with a loss of $1.2bn in 2009.
The broad challenge for Motorola Mobility has been to differentiate its Android-based products from the competition using the same operating system. Nokia decided to use Microsoft’s smartphone operating system earlier this year after concluding that Android-based handset makers faced commoditisation.
Some antitrust experts warned that, with investigations into Google already underway in Washington and Brussels, the deal would face protracted regulatory scrutiny.
In a sign of the lengths it has gone to to win over Motorola despite the risk, one person familiar with the transaction said that Google has agreed to pay a $2.5bn break-up fee if it abandons the transaction, a figure that is thought to be one of the highest on record relative to the value of the deal.
Additional reporting by Tim Bradshaw and Andrew Parker in London and Helen Thomas in New York
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