As a GOOG shareholder, the MMI acquisition is scary news
I've held scores of GOOG stock for the past few years, and it has traded sideways for that entire period. With news of the MMI acquisition finally closing, I'm rethinking my positions in this stock.
First, I'm an avid Android/Google services user, sticking mainly to the Nexus line the past couple of years. As a user, it's the best platform; however, as a GOOG shareholder, Android is turning out to be unnecessarily ominous, especially the Motorola acquisition.
1. Motorola is a cash-burning mess:
Motorola is on track to lose half a billion dollars this year.
2. Google overpaid for MMI:
Google will end up paying almost double MMI's share price the day the deal was announced. $12.5 billion for MMI, which held $3 billion in cash at the time. Why the premium?
Many think that Google is going to spin off MMI's hardware division and keep the cash and patents. Not going to happen. No one wanted to buy MMI until Google stepped in. No one will want to buy MMI without the patents attached.
What does that mean? Google paid $9.5 billion for a stash of 17,000 patents. As Motorola continues to burn cash, the amount that Google paid will add up. Motorola will lose $0.5 billion this year, decreasing the cash to $2.5 billion. So by the end of the year, the acquisition will have cost Google $10 billion.
4. The $9.5 billion for the patents will take decades to pay off, unless Google drastically increases the monetization of Android. Google's profit from Android in 2011 was about $500 million, or about $2.75 per handset. (http://www.asymco.com/2012/05/14/the-android-income-statement/)
Let's say Google doubles Android monetization this year, and doubles again the next, so that they are finally earning $10/handset, as their original goal. It will take Google the next 5-6 years to finally break even on Android.
On the other hand, Apple paid $4.5 billion for 5,000 Nortel patents last year. Guess what? Apple's profit from iPhone sales have already covered that cost. It took them just 3 months.
Google is not $9 billion in the hole on their Android venture. They are subsidizing Samsung and HTC (and, in finality, Motorola - congrats to MMI shareholders). As a GOOG shareholder, I find this disconcerting, and my hope is that Google will turn into a handset manufacturer, and start making mad margins on Google/Motorola phones in the next year. If not, GOOG stock will keep trading sideways for the next decade.