Google Acquisition of Motorola Mobility May Rank as One of Worst of All-Time

Google may have made one of the worst acquisitions of all time this morning. Motorola is a company with no creativity or competitive edge. Google is not gaining any more of its hallmark innovation or creativity, but acting out of desperation and frustration.

We’ve seen many bad acquisitions in the last decade. Time Warner’s acquisition of AOL, Microsoft’s acquisition of Skype, and Bank of America’s acquisition of Merrill Lynch were all examples where management hubris led to gross overpayments. We’ve also seen acquisitions where the acquiring company took on extraordinary financial and legal liabilities in an acquisition, which financially ruined their companies. The Countrywide acquisition by Bank of America and the Guidant acquisition by Boston Scientific’s Guidant fall into this category.

At approximately $12.5 billion for Motorola Mobility, Google didn’t overpay and there is no indication that they have taken on any troubling liabilities. Rather, this acquisition could prove to be extremely detrimental by alienating customers and opening the door to competitors – mainly Apple - to make competitive acquisitions free of regulatory supervision.

Google’s acquisition alienates the Asian manufacturers (Samsungs, HTCs, etc.) who are building devices on the Android platform. Nobody wants to compete with their licensor. In the late 1980’s when Apple was a computer manufacturer and sought to have other’s develop computers on their platform in order to compete with Microsoft, the major manufacturers refused to consider working as a licensee while they competed with their licensor (hence, Apple effectively failed and Microsoft became the de facto operating system for the next twenty years). In the same vein, these large Asian manufacturers will move away from building Android platform phones as they don’t want to try to compete with Google / Motorola on price at the same time as they are a licensee. These manufacturers will find that in order to compete with Google / Motorola on price, you’d want to have a different, non-Android platform. They will look increasingly to Apple’s platform (if Apple opens it up), to Microsoft (as Nokia did), and even to Research in Motion. Unless Google can put Motorola on a new trajectory, Android will lose market penetration as fewer manufacturers and devices will be supporting it.

Apple is the real competitor going forward, and a still bigger problem that Google opens up with the Motorola acquisition is that Apple can now use its cash reserves to do anything that it wants without facing regulatory or anticompetitive scrutiny. The obvious acquisition would be for Apple to buy one of the wireless phone production units of one of the major Asian manufacturers. But, Apple could now also make acquisitions that freeze Google and the Android platform out. One strategy would to buy a wireless carrier (such as Sprint in the US). Another better strategy could just be to acquire Arm Holdings and refuse to extend licenses to Motorola and Google (while extending licenses on favorable terms to those using the IPhone platform).

Google is a huge, strong company that can make big gambles and big mistakes. They did both this morning. The Motorola acquisition may not mark any sort of a decline for Google, but it will prove to have been a bad one it will have substantial adverse consequences for their Android efforts.

Full disclosure: The author is long positions in Google, Apple and Arm Holdings, and currently has no other positions in companies mentioned here.