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MagicDiligence (< 20)

The Google/Motorola Deal Could Affect 4 Magic Formula Stocks



August 16, 2011 – Comments (0) | RELATED TICKERS: IDCC , MSFT , GOOGL

Yesterday, Google (GOOG) shocked the world with its announcement of a $12.5 billion acquisition of Motorola Mobility (MMI). The deal was a surprise to me as well. It was well-known that Google was looking to add patents to fend off challenges from Apple (AAPL) and Microsoft (MSFT) (among others), but for Google to outright purchase one of their OEMs for the Android operating system was a surprise. It puts Google into the low-margin, cutthroat hardware business (way outside of the company's core competencies), and also into direct competition with Android phone giants like Samsung and HTC.

The deal has a direct effect on 2 recent Magic Formula stocks, and potential repurcussions for 2 others as the Android market is shaken up:

InterDigital (IDCC) Effect: Negative

Since putting itself up for sale in mid-July, Google has consistently been the primary name linked to an acquisition of wireless patent firm InterDigital. Investors had bid the stock up from $41 to over $75 - a 83% increase - in anticipation of a buyout. Most surmised that a price for InterDigital could reach over $5 billion (~$110 / share), considering that bankrupt Nortel's less substantial patent portfolio sold for $4.5 billion at auction just a month earlier. Apple and Samsung have also been mentioned, but Google was by far the front-runner.

One of the key strategic drivers behind the Motorola Mobility purchase was to build out Google's patent war chest. Moto gives Google access to 17,000+ patents, with thousands more filed. After this kind of cash outlay, it is unlikely that Google is willing to drop billions more in the near term. While there are still plenty of big tech firms looking for patents, none are in as weak a position as Google was, which makes yesterday's sell-off in InterDigital understandable.

Microsoft (MSFT) Effect: Positive

Microsoft has struggled to get its critically acclaimed Windows Phone 7 (WP7) mobile operating system accepted. The company actually earns more from patent royalties on Android than on Windows Phone 7 licensing! Current market share is a paltry 5.8%. Even CEO Steve Ballmer has admitted that WP7 sales are "very small".

It is not hard to see why. OEMs can license Android for free, and customize it how they like - two advantages over WP7. There has really been no angle for Microsoft to exploit. Now it has a powerful one - Google is a direct competitor now. It is hard to see Google not working close with Motorola to craft an integrated hardware + software experience - otherwise, why buy a handset maker? Microsoft is not a competitor in the hardware market. This comes at a great time for the firm, with the new "Mango" release of WP7 coming up next month, plus the OS hitting the mainstream asNokia's (NOK) official smart-phone OS. Microsoft has a golden opportunity to really take some share from Android. And this is not even mentioning potential distractions to Google's search business, where Microsoft also competes.

Hewlett-Packard (HPQ) Effect: Slightly Positive

Google's purchase of a handset maker is an implicit nod to the integrated hardware and software model that has been so successful for Apple today, and for Research in Motion (RIMM) in the past. Tight integration of hardware and software has been key to success there, and even today Android is plagued with fragmentation issues as hardware OEMs "customize" the operating system, and major software updates are a major headache for users to apply.

There is one other integrated smart-phone and tablet maker people forget about: Hewlett-Packard. The company paid just $1.2 billion for Palm last year (a far cry from Google's entry price), and has a well-regarded mobile OS in webOS, as well as competitive smart-phone (Pre) and tablet (TouchPad) products. Any shake-up in the current trajectory of Android is a positive for HP, who possesses the technical, manufacturing, and marketing muscle to compete in this market. More than anything, though, Google just validated HP's strategy. I don't see it having much near-term financial impact on HP, however.

MIPS Technologies (MIPS) Effect: Potentially Positive

One of the overlooked aspects of this deal is that Motorola Mobility contains one of the top set-top box (STB) businesses in the world, and also has significant market share in cable modems. Similarly, Google has its own set-top software product in Google TV, although to date it has been a flop. MIPS, a licensor of microprocessor designs (similar to ARM Holdings (ARM)), has a large presence in both set-top boxes and modems, but recently has reported that mobile devices and set top boxes are converging, where STBs are moving more towards an app model to support such services as Netflix, Youtube, Hulu, Pandora, and other Internet media.

This one may be a bit of a stretch, but MIPS has a strong relationship with Motorola, appearing in many of their products, such as the top-of-the-line DCT digital cable STBs. MIPS has been working closely with Google, trying desparately to break into the Android handset market, where they have seen limited success. It is not inconceivable that MIPS can leverage their existing relationships with both firms to play a key part in future STB and, hopefully, handset products.

Disclosure: Steve owns IDCC, MSFT


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