Google Inc.'s $12.5 billion acquisition of Motorola Mobility Holdings will have positive implications for Nokia Corp. and Apple Inc., but Research In Motion and HTC will have a neutral impact, Barclays Capital said in a note.
We recognize that building a strong patent portfolio is an ongoing process. We believe the $12.5 billion deal values the Motorola Mobility patents at $3.0 billion to $3.5 billion -- or more depending on Google’s long-term commitment to hardware, said Jeff Kvaal, an analyst at Barclays Capital.
Kvaal highlighted that Motorola Mobility has over $11 per share in cash and he valued the Home unit at over $5 per share. This suggests a $24 or $7.5 billion valuation for the Mobile Devices business which he considered mostly driven by intellectual property rights (IPR).
Most investors have shown little confidence in Motorola Mobility's ability to generate more than a low-single digit operating margin -- Kvaal estimates 2.8 percent by 2012. Under that assumption, Google appears to be paying about $10 to $12 per share or $3.0 billion to $3.5 billion for the IPR alone.
Kvaal considers the deal to be driven by Google's desire to shield its Android partners from patent litigation with Motorola Mobility's strong portfolio. HTC, for example, has been roiled recently by a patent dispute with Apple.
Motorola Mobility holds about 17,000 granted patents and 7,500 pending patent applications worldwide, which cover 2G, 3G, 4G, H.264, MPEG-4, 802.11, OMA and NFC as well as strategic areas including audio codec technology, UI, location-based services, power management, wireless email, and other smartphone related applications and services.
Kvaal is of course cognizant that not all patents hold equivalent value and thus a patent count is not a reliable metric. However, other industry players, such as Nokia and RIM, have validated Motorola Mobility's patents with royalty agreements.
He thus views the deal as a defensive but needed step for Google, which has $39 billion-plus in cash as of second quarter. It is also a material near-term positive for other Android vendors HTC, Samsung, LG, and Sony Ericsson.
Overall, we view this as a highly strategic and defensive acquisition for Google as it would include ownership of 17,000+ approved and 7,500 pending patents. Android has significant momentum and as the web increasingly shifts to mobile, we believe Google must protect its Android franchise, which is seeing over 550,000 daily device activations and has sold over 150 million devices, said Kvaal.
Kvaal believes the deal is likely to have a modest impact on telecommunications company and pay TV providers. It should make Android more competitive. In pay TV, Google will be not only a potential competitor, but also a major supplier.
Implications for Nokia
Google’s proposed purchase of Motorola Mobility begs a number of questions for Nokia, namely the position of Windows Phone within the smartphone world and the value of Nokia’s own intellectual property portfolio.
Kvaal concludes positively on both which provides further support to Nokia’s long-term position. The combination of such long-term support and his view that near-term earnings expectations are set at an achievable level leads him to reiterate overweight rating on shares of Nokia.
Kvaal views the attractiveness of Windows Phone as an OS choice as improved following Google's announced purchase of Motorola.
While Google intends to keep Motorola as a separate subsidiary and vows Android will remain open source, he suspects that Samsung, HTC and the other Android partners must be considering their position.
Microsoft, with its links to Nokia, may not be a perfect partner either, but is likely a reasonable hedge. The commitment of a few other major players to Windows Phone would give it greater critical mass to compete against Apple Inc.'s iOS and Android, and this is positive for Nokia.
The last major bulk buyer of IPR may have just made its move, but that doesn't completely diminish its value. Google was under pressure to purchase a significant IPR portfolio given the legal attacks to Android, but other major players have stronger positions. Recent settlements and the ensuing and ongoing payments still provide value to Nokia’s handset business through structurally higher margins, said Kvaal.
Implications for Research In Motion (RIM)
Kvaal considers the acquisition to have limited near-to-mid term impacts on RIM. RIM of course was a participant in the Nortel Networks consortium and has both internally generated and purchased IPR from prior years.
From a fundamental perspective, the BlackBerry maker remains on track to launch its BB7 portfolio globally -- already have seen the launch at AT&T, Verizon and Sprint. These devices provide a needed refresh to RIM's product portfolio ahead of the anticipated launch of QNX based smartphones in early 2012.
From an IPR perspective, over the years RIM has accumulated a number of patents from Ericsson, and most recently Nortel, among others. While other vendors such as Nokia, Ericsson, and Qualcomm may be in a relatively stronger IP position, RIM has successfully sustained about 40 percent gross margin.
Long-term however, Kvaal envisions two scenarios. Strong execution on Google’s part may increase competition within the mobile space leading to the continued and accelerating growth of the Android ecosystem. In this scenario, he expects further competitive pressures on RIM and others. However, mis-execution and increased competitive concerns across the Android community may open windows of opportunity for RIM and others.
Implications for Apple
We believe this deal validates Apple’s business model -- the development of its own inventions, resulting in integrated software and hardware. In order to compete over the long term in the smartphone era it is clear that patents and inventions are going to play a bigger role, said Kvaal.
Motorola Mobility’s patent portfolio (17K patents, 7.5K patent applications outstanding) seems to be the reason Google would be interested in acquiring the company -- especially considering the heightened litigation environment and the recent win of the Nortel Networks patents by an Apple-led consortium for $4.5 billion.
While it is hard to decipher at this point what the purchase does to outstanding court cases, it seems that Google sensed the need to improve its patent portfolio and that the purchase of smaller pockets of patents were not enough.
Long-term, Google will need to balance satisfying Motorola Mobility and other partners equally and Kvaal would assume some partners may explore other operating systems – at least in theory.
However, he noted that HTC already indicated that it feels the acquisition will be positive for the Android ecosystem and that its partnership with Google won’t be affected. He is also watching carefully what this situation means for HP, which has solid mobile software in WebOS, but lacks the momentum to be a serious player to date.
Implications for HTC
Kvaal recommends investors accumulate HTC on Google's acquiring Motorola Mobility, which the market might see as negative for HTC on fears of a deteriorating competitive edge to Motorola Mobility.
The bright point for HTC would be the alleviation of patent issues if Motorola Mobility's extensive patent portfolio helps Google strengthen the Android ecosystem. He takes a neutral view on the event for HTC's short-to-mid term outlook and retain his forecast of HTC's future market share/margins.
Kvaal said Google is buying Motorola Mobility's IPR, not the struggling device business. Since hardware is not Google's core strength, he does not expect it to make a major effort to push Motorola Mobility to compete with its Android partners, Samsung and HTC, which collectively hold 30 percent of the global smartphone market.
A key concern is that HTC may be less preferred than Motorola Mobility for new Google software releases. We disagree. This might lead to share losses and force HTC to diversify into other OSs such as Microsoft's. HTC might pay royalties to Google in the future, but we would expect the expense would be offset by the gain from better IP, said Kvaal.