Google Purchase of Motorola

Google recently purchased Motorola Mobility for about US$12.5 billion (a staggering amount). However, some people are no seeing not only does Google benefit from the thousands of patents (nearly 17,000 as I recall) that Motorola has, but also see significant tax benefits to Google as Motorola continues to report a net operating loss on the income statement. As per a Reauters report:

By agreeing on August 15 to pay $12.5 billion in cash for struggling Motorola Mobility's vast portfolio of 17,000 patents and 7,500 pending patent applications on top of its handset business and television set-top boxes, Google is building a defensive bulwark for its Android phone software, already available on Motorola phones among others.

The acquisition, Google's largest ever, has legal tax and accounting benefits, many associated with the money Motorola Mobility has lost over the years, according to experts who have studied its details.

"The tax benefits of the deal make what was a good deal into a great deal," said Robert Willens, a New York accounting and tax expert. He estimated that through the acquisition, Google can expect to reap $700 million a year in tax deductions from future profits each year through 2019. Google also will be able to immediately reduce its taxes by $1 billion due to Motorola Mobility's U.S. net operating loss, and by a further $700 million due to its foreign operating loss, he said.

However, while some see the patent-purchase as being a good thing, others see the patents as "crap." (See report:

Google says it bought Motorola mainly for its patents. But according to one analyst, those patents are "crap" and won't help Google very much in its patent battles over Android..

The future for smartphones in the US is certainly getting more interesting.

Motorola Affecting Downstream Suppliers

Taiwanese suppliers to Motorola are being heavily impacted by Motorola's poor performance. Motorla's shares recentely tumbled to a 52-week low on Friday to $8.98, 43% down from the a beginning of the year according to IT Portal. IT Portal also says:

Its [Motorola's] mobile phones, which once made up almost a quarter of the global market, are now accounting for less than 1 in every 11 handsets sold and has been overtaken by Samsung electronics; meanwhile smaller competitors like LG Electronics are also catching up.

China Economic News (CENS) points out that this has severely affected Taiwanese suppliers. CENS reports:

In the first quarter of this year, Motorola shipped only 27.4 million mobile phones, sharply down 40% from 45.4 million units posted a year earlier. This has heavily undermined the business operations of its Taiwanese contract suppliers, including Compal Communications, Chi Cheng, Largan Precision Co., Foxconn Technology Group, Silitech Technology Corp., Merry Electronics Co. and Unimicron Technology Corp, especially Compal Communications and Chi Cheng, which both have over half of their total revenues come from sales to Motorola.

One company that has felt the pain of Motorola's non-performance is Wintek. In Q1 2007 Wintek were severely affected by Motorola's non-performance and what Digitimes calls "Motorola's inventory issues." However by diversifying both their client and product portfolio they were able to grow their March sales by 31.97%. According to Digitimes:

Since then (Q1 2007), Wintek has actively developed other applications, such as touchscreens, PNDs and digital photo frames, and has acquired its second 3G LCD panel line from HannStar Display. Its first 3G line also came from HannStar.

With the addition of new orders and new clients, Wintek was able to reduce Motorola's proportion in its first-quarter sales, industry sources said.

Despite this growth in sales, Wintek's stock has also suffered some pain over the last year. From trading at nearly NTD50 per share, the stock dropped to nearly NTD26 and is now trading at around NTD30. The effect of Motorola's non-performance on Taiwan companies does seem to be large. It seems the other companies will have to try and do what Wintek did and find new clients and new growth markets. Here is hoping they succeed.

Article 1: Motorola shares fall to their all time low, could be downgraded
Article 2: Motorola`s Tumbling Sales Hurt Its Contract Suppliers in Taiwan
Article 3: Wintek March sales grow almost 32%