Did Google Lose $9.4 Billion?!

News broke last week that Google plans to sell Motorola to Lenovo. After doing some quick math I wondered, “Did Google lose $9.4 billion here?!”
In 2011, Motorola split its business-oriented and consumer-oriented divisions into two companies. Motorola Solutions contained the enterprise services used by other businesses. The services that produced smartphones and other consumer-oriented products became Motorola Mobility.
Later that same year, Google (NASDAQ: GOOG) purchased Motorola Mobility for $12.4 billion. In explaining the deal, Google noted the following:

Google is great at software; Motorola is great at devices. The combination of the two makes sense and will enable faster innovation.”

When you consider Google’s competitors in the smartphone market, Apple (NASDAQ: AAPL) and Samsung come to mind. Samsung relies on Google’s Android operating system and the two tech titans are partners more often than not.
But Google and Apple? Pure rivalry.
Apple produces all of its own hardware and produces its own operating system as well.
In the case of Google, integration between hardware and software seemed like a logical way to compete with Apple. So Google bought Motorola.

Patents

Google bought Motorola for another key reason: patents.
In this brave new world of huge courtroom battles between technology companies, protecting the patent portfolio could mean the difference between domination and bankruptcy.
In its press release about the acquisition, Google noted the following:

Motorola Mobility’s patent portfolio will help protect the Android ecosystem. Android, which is open-source software, is vital to competition in the mobile device space, ensuring hardware manufacturers, mobile phone carriers, applications developers and consumers all have choice.”

Google has faced patent infringement battles with Apple, Microsoft (NASDAQ: MSFT) and Oracle (NYSE: ORCL).
In a nutshell, using Motorola’s patents to protect Android from Google’s competitors appears to have been just as much a priority as the union between hardware and software.

A Look at the Numbers

Google bought Motorola Mobility for $12.4 billion in 2011 and announced last week that plans to sell its Motorola unit to Lenovo for around $3 billion in 2014, what appears to be a loss of $9.4 billion.
Hmm.
When I first saw that I couldn’t believe Google would be so foolish. So I dug around a bit and discovered that, in fact, Google wasn’t foolish at all.
1. Google’s original purchase price for Motorola Mobility was $12.4 billion.
2. At the time of purchase, Motorola Mobility had around $3 billion in cash on its balance sheet. Purchase price drops to $9.4 billion.
3. Motorola Mobility also had around $1 billion in tax credits that became Google’s after the acquisition. Purchase price drops to $8.4 billion.
4. During the two-and-a-half years that Google owned Motorola Mobility, Google sold a division of the company that produced set top boxes for high speed internet and cable providers. The purchasing company, Arris (NASDAQ: ARRS) paid $2.35 billion to Google. Purchase price drops to $6.05 billion.
5. Now Google is selling Motorola Mobility to Lenovo for $2.9 billion. This drops Google’s purchase price to $3.15 billion.
It would be all to easy to look at this and say, “Ok, Google didn’t lose $9.4 billion. But $3.15 billion is still a lot of money to lose!”
The kicker is that Google is retaining almost all of the patents it acquired from Motorola Mobility, a patent portfolio that it valued at $5.5 billion in a 2012 quarterly filing.

The Bottom Line

With the assets that Google either sold or has retained, Google will come out ahead in the Motorola Mobility deal. Google paid $3.15 billion for a portfolio of patents worth over $5 billion. And more importantly, Google significantly boosted its ability to defend Android in court.
Google will emerge from the Motorola Mobility deal a winner. Its prize? Preserving Android for years to come. Did Google lose $9.4 billion on Motorola Mobility? I think not.

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