How Google’s $7B Loss On Motorola Is A Success (Or Not)

Analysts say that the 'big bet gone wrong' may be win after all

Google spent $12.5 billion for Motorola, sold it off in pieces that returned $5.1 billion, and yet some analysts are claiming that it was a deal well struck.

On its face, Google’s purchase of Motorola Mobility, a deal that closed in 2012, was a failure. It seemed like an overpriced play to buy the old electronics company’s cellular patents. Google surprisingly kept the handset division and it tried to build its own smartphones—that didn’t work well.

Now, Google has a deal to sell Motorola’s smarthphone making division for $2.9 billion to Lenovo. It already got $2.2 billion for Motorola’s cable box making business. That adds up to $5.1 billion, and in one Wall Street breakdown of Google’s Motorola adventure it adds up to a win, despite a seeming $7 billion loss.

“Make no mistake, Google’s Motorola buy was a success,” analysts from SunTrust Robinson Humphrey said, in a report.

In a breakdown of the value of Motorola’s components, the analysts said the handset division was worth $1.9 billion when Google bought it, and Lenovo is paying $2.9 billion.

So, Google comes out ahead in that alone.

Then add $2.45 billion Google keeps in patents, the cash Motorola came with and a favorable tax position, and Google winds up making $780 million from the deal struck yesterday.

Of course, these valuations are just estimates—for instance, the patents are said to be worth $100,000 a piece—and the calculations don’t take into account the drag Motorola has been on Google the past two year, sucking resources from smartphone development and marketing. The one Google phone to be made from the ill-fated union, the Moto X, was a failure—on top of the other doomed phones that Motorola launched under Google’s umbrella.

However, Wall Street is such an optimistic bunch, that it forgives money that’s squandered in the past, when a company makes a move to preserve cash today, as analyst Colin Gillis of BGC Partners said.

“Investors tend to be forward looking—so cash wasted in the past is less of an issue than cash wasted in the future,” he said.

So there may be some disagreement about just how well or poorly Google faired with Motorola.

The hardware company lost $800 million a year, a mark on Google’s super profitable business record. That drain is expected to still weigh on Google when it releases earnings later today. Still, the retreat from hardware has sent some mixed messages.

Gillis pointed out that Google just paid a premium—$3.2 billion—for Nest Labs, a smart thermostat maker. That price is 10 times Nest’s yearly revenue estimates.

Google didn’t need to be the hardware maker, it was an attempt to follow Apple’s model of building the devices, developing the software and selling the services. Now, Google’s other hardware partners—Samsung, HTC and the rest—don’t fear it as a hardware rival, which had raised concerns at the time of the Motorola sale.

“The positioning also seems difficult to understand, where it’s desirable to be in the thermostat business but not smartphones,” Gillis wrote in a note to clients today.

He characterized Motorola as “big bet gone wrong” for a Google known for costly moonshots.

SunTrust analysts noted that Lenovo, the No. 1 PC maker, has the opportunity to compete in smartphones as well, and could expand Google’s Android presence even further.

“The combination of Lenovo and Motorola creates a clear No. 2” in the Android ecosystem, SunTrust said.

Google’s ultimate goal with Motorola was always to create a viable Android player so one company like Samsung didn’t dominate its mobile software.