Google selling Motorola to Lenovo

One thing about Google, it’s not one to invest in businesses that aren’t working. Less than two years after buying Motorola, Google is selling the unit to Lenovo.

Rolfe Winkler and Spencer E. Ante had this story in the Wall Street Journal:

Google Inc.’s experiment making Motorola phones has ended after just 22 months, with the company unloading the handset business to China’s Lenovo Group Inc. for $2.91 billion but keeping a valuable trove of patents.

The deal unwinds the Internet company’s costly move into smartphone hardware after it acquired Motorola Mobility for $12.5 billion in May 2012. Google has struggled to compete in the cutthroat phone-hardware business—its share of the world-wide smartphone market fell to about 1% last year from 2.3% a year earlier, according to IDC.

Google said it will retain the vast majority of Motorola’s patent portfolio, a key motivation of the original transaction that lets it defend those phone makers who use its Android software against patent suits. Google’s Android software powers the majority of the world’s smartphones.

The deal also signals the rising ambitions of Lenovo, which is seeking to be a bigger player in the global technology market.

Lenovo, which last week agreed to buy a server business from International Business Machines Corp., gains a brand that would catapult its place in the global smartphone market to third from fifth, yet far behind Samsung Electronics Co. and Apple Inc., according to IDC. Lenovo became the No. 1 personal-computer maker last year after buying IBM’s PC business in 2005.

The New York Times story by David Gelles, Claire Cain Miller and Quentin Hardy offered this context about the sale:

That  acquisition was Google’s largest by far, and the biggest bet that Larry Page, its co-founder, has made since returning as chief executive in 2011. Google wanted Motorola’s patents and a cellphone maker to help its mobile business, and named Dennis Woodside, a former Google operations executive, as C.E.O.

Selling a major portion of the business would be a concession of defeat for Google and particularly for Mr. Page. Motorola has continued to bleed money, aggravating shareholders and stock analysts, and its new flagship phone, the Moto X, did not sell as well as expected.

This is the second time Google has sold off assets it acquired after buying Motorola Mobility, which was its largest-ever acquisition. In 2012, just months after that deal was completed, Google sold Motorola Home, which included its set-top boxes and cable modems, to Arris for $2.35 billion.

Google will retain most of the patents it acquired as part of its original deal for Motorola, while granting Lenovo a license to use certain ones for its new handsets.

And in a blog post on Wednesday, Mr. Page characterized the initial Motorola deal as more about patents than hardware. “We acquired Motorola in 2012 to help supercharge the Android ecosystem by creating a stronger patent portfolio for Google and great smartphones for users,” he said.

Bloomberg’s Alex Sherman, Brian Womack and Edmond Lococo pointed out that the sale is technically a loss, but not too big of one:

While Google has invested in Motorola, the unit’s revenue has declined. Motorola’s third-quarter sales fell by about a third, even as the company released Moto X, the first smartphone introduced under the direction of Google’s leadership. In November, Google announced it was rolling out a new lower-cost smartphone called the Moto G. Google reports fourth-quarter results tomorrow.

Motorola’s patents have also shown signs that they weren’t a bargain. Google has lost patent cases or was delivered disappointing sums in cases that involved some of the intellectual property. Google had estimated in regulatory filings that $5.5 billion of the purchase price for Motorola was for patents and developed technology.

“This move will enable Google to devote our energy to driving innovation across the Android ecosystem, for the benefit of smartphone users everywhere,” said Google CEO Larry Page in a statement about selling Motorola to Lenovo.

A $2.91 billion sale of Motorola is a far cry from the $12.4 billion that Google paid for the business. Yet Google doesn’t appear to be taking much of a loss, analysts said. After closing the agreement to buy Motorola in 2012, Google got the unit’s $2.9 billion in cash. Google last year also sold Motorola’s set-top box business to Arris Group Inc. for $2.24 billion. And Google keeps the majority of Motorola’s patents, which it can license.

 “It’s probably not as bad as it first appears,” said Aaron Kessler, an analyst with Raymond James & Associates, who rates Google the equivalent of a buy.

Reuters pointed out some of the difficulties that Chinese companies are facing in the U.S. market in a story by Nadia Damouni, Nicola Leske and Gerry Shih:

Chinese companies faced the most scrutiny over their U.S. acquisitions in 2012, according to a report issued in December by the Committee on Foreign Investment in the United States. Analysts say political issues could cloud the deal, especially with Lenovo trying to seal the IBM deal at the same time.

In the deal for the Motorola handset business, Lenovo will pay $660 million in cash, $750 million in Lenovo ordinary shares, and another $1.5 billion in the form of a three-year promissory note, Lenovo and Google said in a joint statement.

In two years, China’s three biggest handset makers – Huawei, ZTE Corp and Lenovo – have vaulted into the top ranks of global smartphone charts, helped in part by their huge domestic market and spurring talk of a new force in the smartphone wars.

The deal looks like a good one for both Google and Lenovo, especially since Google keeps access to the patents it wanted and Lenovo gets access to the U.S. market. While it’s rare to see a behemoth like Google make a misstep, this will likely not be considered one of them.