Google just plunked down $12.5 billion for Motorola Mobility. Would the deal have been cheaper if Big G had just purchased a handset maker back in January 2010 rather than launching the ill-fated Nexus One instead?
To figure that out, we need to look back at the state of Motorola some 19 months ago and apply some mathematical magic.
The thought experiment
When the Nexus One was introduced, Motorola sported a market cap of about $10.6 billion. That's for the entire Motorola beast, including the infrastructure and enterprise operations that later became Motorola Solutions. At the time, mobile devices represented 31 percent of Motorola's sales and did not generate profits. The only fair division available is to split the company along revenue lines.
Thirty-one percent of $10.6 billion is $3.3 billion, and Google is paying 3.8 times that amount. If the deal falls apart for some reason, like failing regulatory approval or due to Motorola's shareholder vote, Google will pay a $2.5 billion breakup fee that nearly equals our hypothetical early-2010 market cap.
In slightly more realistic terms, Google would probably have needed a similar-sized buyout premium back then. This would put the theoretical buyout price at $6.2 billion, or about half of the final price tag.
When Motorola separated last December, the final value of Mobility was one-ninth of the total company—Motorola shareholders received one Mobility share per eight regular shares. Using that ratio instead, you'd get a fair price of $1.9 billion including the buyout boost.
The road not taken
Any way you slice it, Google could have saved a truckload of cash by getting into the hardware game much earlier. Its bold plan to revolutionize the way cell phones are sold fizzled early on, and the Nexus One became nothing but a developer phone in less than six months' time. We don't know what that failed experiment ended up costing Google, but most of the pain was probably passed to Nexus-maker HTC.
Since then, Android's reference models have jumped from one manufacturer to another, including the Samsung-designed Nexus S and Motorola's Xoom tablet. With this acquisition safely under its vest from an early date, Google could have kept that zig-zagging firmly under control and in-house, while also clamping down on the much-maligned Android fragmentation issues.
Moreover, a stronger, Moto-powered patent portfolio might have encouraged Apple to keep its litigious fingers away from Samsung and HTC. Google could have been an official white knight standing by to help any handset designer in Apple's crosshairs. (Then again, Samsung is no slouch in gadgets patents either and Cupertino sure is going after that target. And Oracle would still be complaining about misused Java code. There are no magic bullets in the patent wars.)
On the other hand, Google would also have lost a chance to build the diverse support system that Android now enjoys. Some call it fragmentation and others call it choice or diversity; from that perspective, Mountain View would be probably better off leaving Motorola alone altogether, though it did manage to round up quotes from handset manufacturers saying they support the buyout.
What's new?
Ironically, buying Motorola Mobility makes Google a truer copy of the Apple business model. No longer a hands-off software provider with no financial interest in handset sales, Google now needs to worry about hardware implementation and direct profits. This two-headed beast will deliver the purest Android experience on the market, and will be held up as a role model or pariah when things go right or very wrong for the platform.
And let's not forget that Motorola Mobility might not go home with Google after all. Perhaps the biggest reason to pick up Motorola rather than just buying another basket of protective patents is that regulators might block a pure patent deal but could let this agreement pass because Google is buying hardware operations where it holds no monopoly whatsoever. That doesn't make it a slam-dunk, however.
All told, leaving Motorola on the table for a year and a half added at least $6 billion to the dollar cost but also brought about a slew of less obvious costs—and benefits.
For better or worse, Android just changed in a big way. And if Google had made this move a year ago, the market would look very different today in that unpredictable way that makes hurricanes out of fluttering butterfly wings.
