Why isn’t Wall Street warming to the Google-Motorola marriage?
Two days after announcing its plan to pay a hefty $12.5 billion for Motorola Mobility, Google’s stock isn’t just down more than 4 percent from its pre-deal price, but it’s also been downgraded to a “sell” by Standard & Poor’s equity analysts.
In a note Tuesday, S&P said it was cutting its price target to $500 to $700 and dropping its rating to a “sell” from a “buy.”
“This proposed deal has injected a tremendous amount of uncertainty into Google and the stock,” S&P analyst Scott Kessler told Adweek. “Typically those things are not good for investors.”
Despite Motorola’s valuable portfolio of about 17,000 patents (and another 7,500 pending), with Android-related lawsuits already ongoing, the deal gives no guarantee that Google is in the clear, Kessler said. Beyond that, he added, the Motorola acquisition will adversely impact the larger Android ecosystem—not to mention the damage the deal stands to do to Google’s balance sheet, he said.
“And, oh, by the way, this is pretty pricey,” he said. “The reality is you’re spending $13 billion on a portfolio of patents that is perhaps going to help, but perhaps not going to do much that is going to help, Android . . . [And] this deal is going to significantly degrade Google’s stock and margins and balance sheet.”
While Kessler thinks the deal will ultimately pass regulatory scrutiny and close, he said it would likely happen later than Google’s estimation of early 2012. Even when Google gets ownership of the patent portfolio (assuming the deal goes through), with regards to protecting Android, he said, “Nothing is assured.”
As for Google’s Android partners, such as handset makers HTC, Samsung, and Sony who were once on equal footing with Motorola, they now have an incentive to direct their efforts elsewhere.
“You’re probably going to think about and pursue alternatives, I would imagine,” he said. “At least, as an executive, you might want to come up with a plan B.”
But not everyone is as bearish on the deal.
After the acquisition's announcement, Ken Sena, an analyst at Evercore Partners, said his firm was maintaining its favorable rating of “overweight.”
In a note, he said that while regulatory approval remains a concern, the company is becoming increasingly competitive.
“We see the MMI acquisition, in addition to providing Google with a strengthened IP defense, as aiding Google's efforts to drive users to its core mobile products and to gain traction into the living room,” he said.
Clayton Moran, an analyst at Benchmark Co., told Bloomberg News that the acquisition is “the next step in building their position in the mobile world so they can distribute Google products and services through mobile phones and tablets.
“They want a success with the Android platform, and this will enhance their position in the mobile marketplace, as well as defend their position through the patent portfolio,” he said. Moran recommends Google stock.
Still, Google’s stock activity doesn’t appear to reflect analysts’ positive assessments.
Since its pre-deal closing price Friday afternoon of $563.77, Google’s share price has dropped about 4.4 percent, falling to less than $539 in after-hours Tuesday.