Google buys Motorola for 12.5 billion USD. Is it a good idea?

Big M&A news coming out yesterday from one of our recommended stocks in New York. We had Google announcing a massive $12.5bn deal to buy Motorola's cellphone business. A deal that has picked up a lot of criticism. It is the biggest acquisition in Google's history and throws them into the extremely competitive world of smartphone and tablet hardware manufacture.

So what is the rationale behind this acquisition? Clearly Google want to compete with Apple who manufactures both the hardware and the software of the iPhone and iPad. Remember, Google own Android which is the platform used by 39 handset makers which includes HTC, Samsung and already Motorola. In fact, Android dominates the smartphone market with 40% market share. Maybe they feel the design of the phones who operate Android are not up to scratch and Google feel they can do a better job by being able to integrate the design of the hardware to perfectly blend with the design of the software? The overall product will be entirely in Google's hands.

But what would Samsung, HTC and other hardware manufacturers who use the Android platform think about Google buying one of their direct competitors? Surely Motorola handsets would be favoured with better software or at least will be first in line to get upgrades. Plus, if the integration of the software and the hardware turns out to be successful, these competitors will start losing market share. On this news Nokia shares shot up over 16% with the possibility of Microsoft employing a similar strategy and buying them out. One would think that Microsoft could also directly benefit from this if Samsung and the likes decide to leave Android and use the Windows software.

But there is more to this acquisition than meets the eye. Beyond the obvious of hardware production, analysts reckon the main reason for the acquisition was for Google to get their hands on the 24000 patents that Motorola own. These days, when it comes to technology, patents are vital. Law suits are popping up everywhere, hampering companies from producing new designs which could probably suit their model perfectly but are already patented by a competitor. Apparently both Microsoft and Apple were planning an anti competitive patent attack on Android. Therefore having these patents in the portfolio could protect them from such an attack.

Hence such an acquisition could be considered more defensively orientated from Google who actually have the smallest patent portfolio of all the big players. We know how cut throat the technology sector is and it seems that only if you have the biggest and the best will you survive. Having the biggest defence mechanism in terms of a huge patent portfolio seems like a good decision. The technology sector has almost become like the pharmaceutical sector when it comes to law suits so if Google are looking to strengthen their cavalry in this department then I am happy with the deal. We will keep a close eye on it however, $12.5bn is nothing to be laughed at.

The one angle that I want to add is the Carl Icahn angle here. He has been buying Motorola (before the split of the two businesses) shares since January 2007, tried to get a board seat, failed, then sued Motorola to get four board seats, then tried to force Motorola to sell their mobile business in March of 2008. But ultimately has got what he wants, not so? That is so typical, and amazing how these corporate raider types can get it right, time after time. But, before you get excited with his genius, the two companies Motorola Mobility and Motorola Solutions were separated from each other, with Motorola Mobility trading at 31.50 in January. So I guess it is safe to say that Google thinks they paid the right amount.