

Standard & Poor's gives Google the U.S. debt treatment - abennett
http://www.itworld.com/mobile-wireless/194405/standard-poors-gives-google-us-debt-treatment

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gamble
If Google really bought Motorola for the patents alone, we should expect
massive layoffs as they wind down the phone manufacturing business.

If, as many have speculated, Google actually wants to follow Apple into the
integrated software/hardware market, then this is a bet-the-company decision
that will either see Google mired in a failed merger on the scale of AOL/Time
Warner, or if successful it will provide a growth engine for the next decade
and badly-needed diversification.

I think it's pretty hard to look at this deal purely from a technical analysis
perspective, since no one except a handful of senior staff at Google really
know what the plan is.

~~~
enjo
It wouldn't surprise me at all to see them spin Motorola right back out into a
separate entity. It would actually make a lot of sense. Google gets their
patents and a very cooperative manufacturer, without the worry of managing
Motorola day-to-day.

That $12B will be quickly absorbed.

~~~
orky56
If this new Motorola entity is separate from Google and without patents (since
Google would have them), this new Motorola Mobility would no longer have any
leverage for itself and could easily fall prey to future patent lawsuits.

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joelhaus
Scott Kessler, the S&P equity analyst, gave an interview about the downgrade
to Bloomberg West today:

<http://www.bloomberg.com/video/74044556/>

His justification was as follows:

    
    
      1) Google will not be able to close the deal by early 2012.
    
      2) Current related litigation is not helped.
    
      3) No one knows how much protection the patents will add.
    
      4) Moto will have an adverse impact on financials going forward.
    

At the end of the interview, Kessler comments that Google is making this move
with a long-term view, while S&P is "obviously" looking at this transaction on
a "micro-basis".

~~~
enjo
2) I don't understand. Just the threat of Google launching that missile at
Apple and friends has to severely curtail patent litigation. If Apple knows
that Google will soon have the ability to deliver a haymaker of their own,
they are MUCH more likely to negotiate a cease-fire.

~~~
joelhaus
#2 is probably in reference to the Oracle claims since the Moto patents are
more focused on wireless technologies, at least that would be my guess.

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wtvanhest
GOOG's market cap is $174B. A $12B cash purchase for Motorola Mobility
Holdings Inc is not consequential to GOOG's balance sheet. (But it does seem
like a big premium given that that price is above their 10 year high.)

There is obviously integration risk, but I believe the integration risk is low
compared with the potential upside.

The reality of our world now is that almost everyone in every country living
above poverty will own a smart phone.

Buying Motorola gives GOOG the ability to capitalize in a different way than
just search and whatever value they get from the patent acquisition is bonus.

5 years from now, this will be viewed as an intelligent acquisition which
provided a lot of value to GOOG, but most likely not the way most people are
looking at it today.

*Scott's micro-basis is not a good way to look at this acquisition and by not looking at the big picture (mobile growth) he may have made a serious error.

~~~
epistasis
12/174 =~ 7%, which is a significant amount of any company's market cap, and
very consequential to the balance sheet.

I've never heard of such a large integration that has _ever_ worked in the
tech field; what percentage of Motorola's employees would be hired by Google
through their normal rigorous procedure?

Large integrations have always been failures; this is definitely a bold move,
but based on the history of these types of purchases elsewhere in the tech
field, and the difference in corporate cultures, the best possible course
would be to not integrate at all.

~~~
nl
Large integrations have worked at times in the past mostly when one company
bought a competitor (or semi-competitor) for its market share. Generally they
haven't been great for employees of the company that was taken over, though.

Some examples include: DEC/Digital (bought by Compaq), Netscape Server
business (bought by Sun at the same time AOL bought the rest of the company),
Compaq (bought by HP), Lotus (bought by IBM in a _hostile_ takeover),
Peoplesoft (hostile takeover by Oracle), BEA System (bought by Oracle), Sun
(bought by Oracle).

There are also numerous examples in the telecommunications market.

The Oracle/Sun deal is the most interesting in this context, because it is a
software company taking over a hardware company (yes, Sun has software, but
one of the reasons Oracle bought it was to compete with HP & IBM on complete
system integration all the way down to hardware).

It's clear there are plenty of examples where this didn't work. Google has a
huge challenge, but there are some precedents for this working.

~~~
stonemetal
May be we have different ideas of what constitutes working out well, I
wouldn't have considered the subsequent failure and acquisition of Compaq and
Sun to be good outcomes.

~~~
nl
_subsequent failure and acquisition of Compaq and Sun to be good outcomes_

I don't understand what you mean. Compaq and Sun were struggling _prior_ to
being taken over, not afterwards.

I'm more familiar with the case of Sun, but in that case some kind of take
over was what all the shareholders were hoping for. The employees and many in
the tech industry might have preferred a different buyer.

~~~
stonemetal
Compaq bought DEC, got into trouble and got bought by HP. It was a fairly
short time line between rescuing DEC and needing their own rescue. How is that
a good out come? I am not saying buying DEC brought them down but it certainly
didn't save them from impending doom.

As far as Sun goes there is a much longer time line between the Netscape
purchase and there own, but the way Sun fell apart until its eventual purchase
isn't what I would call a paragon of success.

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Eliezer
These price targets are ridiculous. If S&P actually knows where prices are
going, why aren't they running the world's largest hedge fund?

~~~
mkramlich
I have a theory about how a lot of Wall Street secretly works: the best way to
predict the future is to make it happen the way you want.

~~~
JonnieCache
I don't think that's much of a secret. It's written into the maths as far as I
can see.

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thezilch
I'm not convinced that Google doesn't know the manufactoring nor device game.
For one, they have designed and provisioned their own servers, racks, and data
centers for "ever." As well, they have had their hands in building out both
Nexus devices.

~~~
bdonlan
Servers in a data center are a very different beast than portable devices.
They also have far fewer regulatory restrictions than cell phones; you don't
need to register your custom server with the FCC, after all.

~~~
olefoo
The unfortunate thing is that it's all too easy to imagine a scenario where
you do have to get approval from a .gov regulator to put a server on the
internet.

Or worse, several of them. Your copyright license, your permit for attaching
to the internet, your Homeland Security Virus Scanning permit, etc.

~~~
ma2rten
Man, it's the internet. Just put your servers in another country.

~~~
olefoo
Didn't work for Google in China all that well, did it now?

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adjwilli
Let's say Microsoft and Apple can only go after the handset makers for
whatever reason, and they win. Thst means handset makes will drop Android for
WP7 or MeeGo.

Now that Google has is own cell phone manufacturer, it will still be able to
produce an Android phone.

Patents I'm sure are important too, but being able to control manufacturing is
crucial if the handset makers bail.

~~~
bluedanieru
I'm not sure how this works, but the Rockstar Consortium, or whatever
nonsense, that bought up the Novell patents, provides legal cover against any
entity outside of that consortium right? Google could conceivably provide
something similar to Android partners.

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digikata
Why would Google necessarily care about their S&P rating? They have enough
cash that they don't have to issue bonds, similarly with equity - I doubt it
changes the dilution constraints to issuing new equities much. Short term
debt? Nope, that cash again. Financial easing of big purchase deals? What
banker is going to pass up working with Google?

~~~
MattLaroche
This isn't about Google's bond-worthyness or financing corporate debt, but
instead about their stock's perceived value. (The article talks about GOOG
being rated "buy" versus "sell", not AAA or B which are bond terms.)

S&P ratings do affect how Google will run the business: If Google's stock
takes a hit, employees get restless and are more likely to look elsewhere for
employment. Employees aren't always long term focused in stock prices. Google
could use this as an excuse to buy back their own shares to drive up value.

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6ren
The point about margins is perceptive. Hardware is a _very_ different
business.

~~~
wtvanhest
Margin differences between industries are obvious to a Sell-side/buy-side
analysts. The analyst in this case talks about the difference in margins like
a lower overall margin for google would be bad.

It won't be bad because Google will now have additional revenue (&profit) at
that low margin and will be operating 2 different businesses. If anything is
scary about this transaction it is the integration risk. Lower overall margins
are not an issue for valuation.

This particular sell-side analyst may be using a model which does not value
the company in 2 pieces which will give him a lower valuation than it should.

Google's new valuation should look like this:

Google's business prior to acquisition + Motorola's valuation + additional
gains or losses from integration/synergies = Google's new valuation.

*also note that in finance valuations, the lower standard deviation of returns, the lower the risk premium so having Motorola may actually increase the valuation. On the other hand those buyers of google who wanted pure play search/cloud exposure may sell off google's shares.

~~~
rjd
I read the whole thing buy out as extremely ominous. The size of motorola
mobility (if I read it correctly) was larger than Google. It has the potential
to destroy Google from a logistical stand point, tie it up in so much red tape
that it can't survive... or worse becomes a lame duck like Microsoft is now.

Profit margins aside its extremely hard to join to companies together. Infact
one of my friends from childhood is an HR consultant who specialises is
assisting business merge.

You wouldn't believe the crap he's told me, lets say fraud is generally
everyones first order of business. If its like at any other company the people
at motorola aren't going to be very happy with this new position and will try
and take its parent company for all its worth before moving to a better
position.

I assume Google is going to start issuing commands and maybe merging or
forcing joint teams with the R&D departments, thats going to make things very
difficult at motorolas end. Productivity is going to decrease as communication
issues arise. People at motorola will probably get annoyed at being dictated
to, always being wrong for misunderstanding directives, and want to move on
(like I said above will take Google for all they can while they do it). Theres
a serious chance they will view Google as an ivory tower issuing commands
whilst being out of touch of reality. Loyalty will plummet.

Google is in for pain. Serious HR pain. A company that hasn't got a good
record of dealing with things like that. Thats going to cost A LOT of money to
work through.

~~~
X-Istence
Motorola Mobility is estimated at around 20,000 people. Google is at 29,000
people. So just a little bit smaller.

