Google Paying Dot-Com Bubble Price in Motorola Deal: Real M&A
Google Inc. (GOOG) needs to secure mobile- phone patents so badly it’s willing to pay the highest premium for a wireless-equipment company since the dot-com bubble.
Google, maker of the Android mobile-phone software, agreed to acquire Motorola Mobility Holdings Inc. for $40 a share in cash, or 73 percent more than the stock’s 20-day trading average. That’s the most expensive premium paid in a wireless- equipment takeover greater than $500 million since 1999, according to data compiled by Bloomberg. The $9.8 billion price tag including net cash is 32 times the target’s 2010 adjusted earnings, also the highest valuation in 12 years, the data show.
While General Counsel Kent Walker said last month Google would be “disciplined” in its approach to patents, the Mountain View, California-based company is paying a rich enough premium to deter rival bids for Motorola Mobility’s more than 17,000 patents, said Nomura Holdings Inc. After losing out on Nortel Networks’ licenses to a group including Apple Inc. (AAPL), Google is now using its $39 billion in cash to buy exclusive rights to mobile-device technologies to fend off lawsuits and compete against rival smartphones such as Apple’s iPhone.
“In order for Google to gain leverage, Google was forced to overpay for this company,” Chad Morganlander, a Florham Park, New Jersey-based money manager at Stifel Nicolaus & Co., which oversees more than $115 billion in client assets, said in a telephone interview. “This deal is a defensive move by Google.”
Becki Leonard, a spokeswoman for Motorola Mobility, and Aaron Zamost, a spokesman for Google, declined to comment on the valuation.
Motorola “has a strong patent portfolio, which will help protect Android from anticompetitive threats from Microsoft, Apple and other companies,” Larry Page, chief executive officer for Google, said on a conference call yesterday.
Google, the biggest maker of smartphone software, agreed to pay $12.8 billion for Libertyville, Illinois-based Motorola Mobility’s equity, according to data compiled by Bloomberg that includes exercisable options, to add its mobile patents and expand in the hardware business. Motorola Mobility also has $3 billion in cash and no debt.
The deal, which was approved by both companies’ boards, is the largest in the wireless-equipment industry in at least a decade, the data show.
The 73 percent premium is the highest offered for a wireless-equipment maker greater than $500 million since MCI WorldCom Inc. agreed to buy CAI Wireless Systems Inc. at a 209 percent premium more than a decade ago, data compiled by Bloomberg show. The industry average is 38 percent.
Based on 2010 financial results, Google is paying 32 times earnings before interest, taxes, depreciation and amortization, the data show. That’s the most expensive valuation since Intel Corp. offered 43 times Ebitda for DSP Communications Inc. in 1999, data compiled by Bloomberg show.
“They just wanted to make sure that this was very, very attractive to Motorola and that they’d say yes without any issues,” Mike Genovese, a Greenwich, Connecticut-based analyst at MKM Partners, said in a phone interview. “So, they’re doing it at a big premium and all in cash.”
Motorola Inc. split in January into Motorola Mobility and Motorola Solutions Inc., which makes radio equipment for emergency workers and scanning devices for retailers. Motorola Mobility’s Ebitda is expected to climb 42 percent this year to $436 million, according to 17 analysts’ estimates compiled by Bloomberg. The deal multiple would be 22.5 times Ebitda, based on 2011 financials, the data show.
Reverse Breakup Fee
Given Motorola Mobility’s cash, the purchase price is not “crazy,” said Brian Barish, Denver-based president of Cambiar Investors LLC, which oversees about $8 billion, including almost 7.9 million shares of Motorola Mobility. Google may sell the television set-top box and mobile-phone hardware businesses, he said.
Google agreed to pay Motorola Mobility $2.5 billion if the deal falls through, said a person with knowledge of the situation, who declined to be identified because the detail hasn’t been disclosed. The reverse breakup fee is more than six times the typical amount relative to the transaction’s enterprise value, according to data compiled by Bloomberg.
Motorola Mobility, which had dropped 26 percent since its separation before the takeover was announced, closed at $38.12 yesterday. The mobile-phone company was about 4.7 percent below the purchase price, a “normal discount,” according to Timothy Ghriskey, Bedford Hills, New York-based chief investment officer at Solaris Group LLC, which manages $2 billion.
“I’d be surprised if there’s another bidder, especially given the premium that Google is paying and the reverse breakup fee and the fact that this is all cash,” Ghriskey said in a phone interview. “Clearly this is a premium bid.”
Motorola Mobility fell 0.3 percent to $38.02 today. Google declined 3.3 percent to $539, after dropping 1.2 percent yesterday.
The deal values Motorola’s more than 17,000 patents, as well as 7,500 more that are pending, at about $6 billion, or almost two-thirds of the total equity price, Stuart Jeffrey, a New York-based analyst at Nomura, wrote in a research note yesterday.
“In Google’s mind, the patents make up the majority of that value,” Chris Marlett, chief executive officer of MDB Capital Group, a Santa Monica, California-based investment bank specializing in intellectual property, said in a phone interview. “Right now everyone is getting very excited about patents. There’s an urgency in the mobile space.”
Google, with $39.1 billion in cash and short-term investments, was outbid in June for bankrupt Nortel’s 6,000 patents with a $4.5 billion offer from a group of six companies including Apple and Microsoft Corp. (MSFT) That was five times the amount of Google’s initial bid.
Last month, billionaire Carl Icahn urged Motorola Mobility to explore alternatives for its patent portfolio, which the activist investor said was “substantially larger than Nortel Networks’ and includes numerous patents concerning 4G technologies.”
Google is aiming to increase competition with Apple’s iPhone by bolstering Android, which Google offers to phone manufacturers for free, Matt McCormick, a money manager at Cincinnati-based Bahl & Gaynor Inc., which oversees $4 billion, said in a phone interview.
“This is an attempt to increase the ante in the smartphone market,” McCormick said. “Google is committed to Android and is willing to pay a substantial premium to maintain its position and enhance it.”
Android was the top smartphone operating system in the second quarter as sales rose more than fourfold to account for 43.3 percent of the market, according to research firm Gartner Inc. The Android software runs on Motorola Mobility’s phones, as well as some handsets made by Samsung Electronics Co. and HTC Corp. Apple had an 18.2 percent share, the researcher said.
Apple and Microsoft have sued Android-based device makers regarding the use of intellectual property, disputes that are still awaiting court rulings. In a blog post Aug. 3, Google said Apple, Microsoft and Oracle Corp. were using patents to wage a “hostile, organized campaign” against Android.
“If a company intends to compete in mobile devices and doesn’t come to the table with a broad array of patents at its disposal, it will be competitively disadvantaged,” said Cambiar’s Barish.
The acquisition shows that Google is fighting to maintain its foothold in the mobile-device industry, said MDB Capital’s Marlett.
“Luckily they have the market value to be able to compete,” Marlett said. “Google’s entire franchise is based upon capturing your eyeballs on a screen, and all the eyeballs are going to mobile devices. Google either has to get into the device side of the business, or they have to buy enough IP that they can battle effectively.”