Google said today it has agreed to buy Motorola Mobility for $12.5 billion, giving the search giant valuable intellectual property and getting it directly into the handset business.
Google will pay $40 a share in cash for Motorola, a 63 percent premium over the company's closing stock price on Friday. The acquisition will "mildly" add to earnings once the deal closes by year's end or early 2012, Google said.
The deal simultaneously lends stability to and shakes up the Android world. With Motorola, Google gets a treasure trove of patents to defend itself and its partners against a rising tide of legal opposition. Over the past few months, major technology players such as Apple and Oracle have sued either Google or its partners in an attempt to slow down their competitors and extract licensing fees.
"We believe we'll be in a very good position to protect the Android ecosystem for all of our partners," David Drummond, Google's chief legal officer, said today during a conference call. He declined to provide specifics on the company's future legal strategy.
At the same time, the deal puts Google in the awkward position of competing against many of its partners. For the first time, Google will have a direct hand in the mobile business that it fostered from a distance. While Google creates the Android operating system critical to running millions of smartphones and tablets, it has yet to get into the design and manufacturing business itself, aside from a few experimental models with handset partners such as HTC and Samsung.
Google Chief Executive Larry Page said during the conference call that Motorola will be run as a separate unit and reiterated Google's commitment to keeping Android open. He declined to get into specific dynamics of how Motorola will compete with other Android vendors such as Samsung, HTC, or LG Electronics.
Instead, Google focused quite a bit on the protection it will gain from the deal.
In the same vein, Motorola Chief Executive Sanjay Jha had talked up the strength of his company's patent portfolio during its most recent quarterly conference call and suggested that he was willing to step into the legal fray as well. Motorola already has an outstanding dispute with Microsoft and Apple. Last month, billionaire activist investor Carl Icahn disclosed that he was pushing for Motorola to sell its patent portfolio because the need for intellectual property has reached at an all-time high.
On today's call, Jha touted the company's 17,000 patents and 7,500 pending patents. They include many non-essential patents that aren't core to a phone's operations but can be used to improve features such as voice quality. It's unclear whether Android partners will get access to those patents, or whether Motorola's patent portfolio will simply offer legal cover.
Motorola, along with HTC, has been a major early supporter of the Android operating system. Jha chose to scrap Motorola's other projects and focus solely on Android, which paid off immensely when Verizon Wireless chose the original Droid to push as its flagship phone during the 2009 holiday-shopping season. AT&T more recently chose Motorola's Atrix as a flagship phone. Motorola has also renewed its ties with Sprint Nextel. Last month, it reported better-than-expected second-quarter results and hinted at a strong fourth quarter.
But the company has struggled recently too. While the Atrix was heavily promoted by AT&T, it wasn't a breakout hit. Motorola's first tablet, the Xoom, failed to make a dent in the market, even after a price cut. The 4G capability for its Xoom is still unavailable despite hyping the feature at the Consumer Electronics Show in January. And the company's long-delayed Droid Bionic for Verizon Wireless isn't expected until next month.
Page, however, said that Motorola continues to have "tremendous opportunity for growth," adding that he likes Jha's vision for future products. Beyond smartphones and tablets, Motorola has a television set-top box business and has relationships with carriers and cable providers, an area where Google can push its connected-TV ambitions. Likewise, Jha said he sees the opportunity for more convergence between the set-top box and mobile devices.
"We'll be able to deliver products that will delight customers," Jha said.
Drummond said he expects that the deal will require regulatory approval and added that he is confident it will be approved.
"Android is clearly adding competition, innovation, and user choice," he said. "Protecting that ecosystem is pro-competitive almost by definition."
Google, meanwhile, will be attempting to maintain its neutral stance in Android land even after the deal.
"Our vision for Android is unchanged and Google remains firmly committed to Android as an open platform and a vibrant open source community," Andy Rubin, senior vice president of mobile at Google, said today in a statement. "We will continue to work with all of our valued Android partners to develop and distribute innovative Android-powered devices."
Rubin added on the call that the other major Android vendors showed "enthusiastic support" for the deal.
Google offered a Web page listing comments from other vendors.
"We welcome today's news, which demonstrates Google's deep commitment to defending Android, its partners, and the ecosystem," J.K. Shin, head of Samsung's mobile division, said on the page.
Updated at 5:55 a.m. and 6:36 a.m. PT: to add more background, details, and executive comments.