Google to Buy Motorola Mobility For $12.5B; Regulatory Scrutiny Expected

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Google Inc. has agreed to buy Motorola Mobility Holdings Inc. for $12.5 billion, a deal that would give the search engine giant more than 17,000 patents and turn it into a major manufacturer of mobile handsets.

Though the largest acquisition to date for Google, it is something of a marriage of convenience for the two companies: Motorola manufactures phones that run on Google's Android operating platform, which is now the leading smartphone operating system in the United States with a market share in excess of 30 percent.

A tight-knit alliance with Google and early adoption of Android have helped Motorola raise profits and fight its way back into the cellphone market.For Google, an alignment with Motorola will put the company in a position to rival Apple, the maker of the iPhone and iPad.

Google Finds Android Synergies.

Android is now used in more than 150 million devices, with 39 manufacturers. The operating system accounted for 43 percent of smartphone sales in the second quarter of this year, according to Gartner Research; a year ago, that share was only 17 percent.

All four of the largest mobile network operators in the United States—AT&T Inc., Verizon Wireless, Sprint Nextel Corp., and T-Mobile—now offer Android phones. When the first Android handset, the G1 from HTC, was introduced, only T-Mobile offered it.

“In 2008, Motorola bet big on Android as the sole operating system across all of its smartphone devices,” said Larry Page, CEO of Google, in a blog post announcing the deal Aug. 15. “It was a smart bet and we're thrilled at the success they've achieved so far. We believe that their mobile business is on an upward trajectory and poised for explosive growth.”

In January, Motorola Inc. split itself into two companies, Motorola Mobility and Motorola Solutions, to better focus on core businesses. Motorola Solutions was organized to concentrate on business and networking customers.

“Motorola's total commitment to Android in mobile devices is one of many reasons that there is a natural fit between our two companies,” Page added. “Together, we will create amazing user experiences that supercharge the entire Android ecosystem for the benefit of consumers, partners and developers everywhere.”

Page said the company plans to run Motorola Mobility as a separate business that will remain a licensee of Android, and maintain Android as an open platform, which appear to have allayed the concerns of its partners who make Android-powered handsets, such as HTC Corp., Sony Ericsson and LG Electronics Mobile Communications Co. for now, according to industry stakeholders surveyed by BNA.

Google to Raise IP Profile.

While the deal will give Google its first significant foothold in the hardware business, the company will also come away with an attractive portfolio of wireless patents. Google has been slowed of late by a lack of intellectual property in wireless telephony.

Last month, Apple and Microsoft formed a consortium of high-tech firms and successfully outbid Google for roughly 6,000 patents from Nortel Networks, a Canadian telecommunications maker which filed for bankruptcy in 2008. Apple and Microsoft paid $4.5 billion for the patents. Google has railed against the deal as an anticompetitive strategy. The Google-Motorola deal will enable Google to “better protect Android from anti-competitive threats from Microsoft, Apple, and other companies,” Page said.

At the same time, Google continues to face patent-infringement lawsuits. Most recently, Apple filed suit against HTC and other hardware makers who manufacture Android phones.

DOJ, FTC Scrutiny Expected.

Google will now to have to convince the Department of Justice and the Federal Trade Commission to approve the deal amid allegations that the company has abused its dominant position in the online search market.

Google has increasingly been the subject of competition-related investigations in recent years. In June, the FTC subpoenaed Google as part of an agency review of the firm's business practices, including in search and advertising. In April, the Justice Department announced a proposed settlement with the firm to resolve competition concerns related to the company's plan to acquire ITA Software, a flight information software company.And last year, the European Commission formally opened an investigation into charges that Google had been abusing its search engine market share by discriminating against smaller competitors, including some websites and advertisers.

Google, however, keeps pressing ahead, making inroads into a range of market subsets, mostly by acquiring smaller companies. The Motorola deal would be the company's biggest ever, far surpassing its $3.2 billion acquisition of DoubleClick, which gave it a toehold in the online graphic and video ad market.

“This is not a horizontal transaction; Google has not materially been in the handset business,” a Google executive said during a conference call Aug. 15.

Analysts from Stifel Nicolaus said the deal is likely to be approved by regulators. In a research note issued Aug. 15, Stifel noted that there are no antitrust or regulatory concerns that would constitute “deal breakers.”

“This doesn't mean the combination of Google—and its Android wireless platform—and a major manufacturer of wireless equipment and video set-top boxes won't receive significant scrutiny, particularly at a time when the FTC is reportedly conducting an investigation that is looking into Google's Android practices and other issues,” the analysts wrote. “Google said that it had talked with some of its top Android partners and that they were all enthusiastic about the Motorola Mobility deal, but we can't rule out that some Android partners or others may have some concerns that would lead them to seek greater assurances and possibly government conditions, perhaps regarding nondiscriminatory treatment.”

It is believed that the FTC and DOJ, or both, will review the deal on antitrust grounds. Motorola Mobility does hold some licenses that would require Federal Communications Commission approval to be transferred to Google, but it is still unclear if the agency will conduct a full-blown or pro-forma review, Stifel said.

Google expects to close the deal in early 2012. The acquisition has been approved by the boards of both the companies.

By Paul Barbagallo

For Page's blog post, visit http://googleblog.blogspot.com/2011/08/supercharging-android-google-to-acquire.html