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By Jeremy Glaser | 08-15-2011 11:13 AM

Google Gets Defensive With Motorola Buy

Motorola Mobility's deep patent portfolio was a key driver of Google's decision to snap up the handset maker, says Morningstar's Rick Summer.

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. Google made a surprise announcement Monday that it is buying Motorola Mobility for around $12.5 billion. I'm here today with Rick Summer. He is a senior analyst here at Morningstar who covers Google. We'll take a look at what impact this could have on all the handset makers and manufacturers. Rick, thanks for joining me today.

Rick Summer: Sure thing. Good to be here.

Glaser: So, let's just take a quick look at this almost-$40-per-share offer for Motorola Mobility. It's a fair amount above our fair value estimate. Is Google overpaying for this?

Summer: Yeah. Clearly, we think it is. I mean you look at where Motorola is valued; it had a fair value estimate of $27. Obviously, there can be some synergy that Google gets out of this, but this isn't a financial transaction. This wasn't a opportunity that Google found. We don't think Google looked at Motorola as an undervalued asset and that Google needed to get in the handset business. But it is true Google probably overpaid. But you look more than a $200 billion market cap, it could be OK that Google overpaid by roughly $4 billion.

Glaser: So this was a strategic transaction. Let's talk about some of that strategy. Why does Google feel the need to actually start manufacturing handsets instead of just licensing the Android operating system as it was previously?

Summer: Sure. A great question. I mean, what does this give Google that it didn't give the firm before? It certainly gives it some baggage on the downside. The handset business is not a business we particularly like. It doesn't have a lot of competitive advantages. So you really look at the reasons why Google would have gone after the business. It certainly isn't transformative. It's not something that really creates a lot of great opportunity. So what is it? It's defensive by nature.

You can look at all the activities gone around with Android during the last couple of quarters, and they've all been litigation-related. Motorola Mobility has about 17,000 active patents. I think there was another 7,500 that are in filing right now around the world. Google has obviously been under assault, and its partners have been under assault. The firm recently lost a very large intellectual property auction for Nortel's assets out of bankruptcy, and it lost to an Apple-led consortium. A lot of noise was made about Google losing that auction at the same time. The firm has been shopping around looking for other asset portfolios, and this happens to be one where it actually can get some assets that are certainly relevant.

Glaser: So it sounds like Google wasn't that excited about the Droid as much as it was excited about the patents underlying that handset. But what does this mean for the other partners then now that they are in the business? If I'm HTC or if I'm Samsung, am I looking at other places other than Android for my smartphones?

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