By Tiernan Ray
Yes, folks, even more reports continue to pour in regarding Google’s (GOOG) announcement this morning it will buy Motorola Mobility (MMI) fro $12.5 billion in cash.
Google stock continues to slide this morning, down $16.24, or almost 3%, at $547.53.
Sameet Sinha, B. Riley: Reiterates a Buy rating, while cutting his price target to $724 from $768, writing that increased cost of capital and a lower earnings multiple will create an “overhang” on Google shares. “While we are in favor of the end, the means to do so changes the financial and operational structure of Google as it puts them into businesses where it has no experience and threatens the ecosystem. The deal should face significant regulatory scrutiny to assess the benefit to Google’s Search and Display businesses.” Sinha steps through a discussion of the various risks: “GOOG does not know manufacturing. While MMI will be run as a separate unit, we would rather that GOOG sell off the manufacturing piece, as there cannot be synergies without impacting the ecosystem [...] By owning one of these [Android hardware] partners, it stands to alienate the others. While the company had testimonials for other partners supporting the deal, the realities of business and competition, can be very different.”
Ross Sandler, RBC Capital Markets: Reiterates an Outperform rating on Google stock and a $790 price target. The deal is expensive, taking up a quarter of Google’s cash. There’s perhaps $10 billion implied for the patents, based on the implied value of the existing business, he writes, though it’s impossible, in his opinion, to say just how much Google is overpaying. But with $2 billion to $3 billion in free cash flow per quarter, Google can afford to spend a year’s cash generation on the deal. “We have consistently stated that the likely outcome of all of these lawsuits is licensing agreements among the various Android OEMs and the patent holders (similar to the $5/unit that HTC (2498TW) currently pays to Microsoft (MSFT) for Android), and with this acquisition Google vaults itself to the top of the foodchain in terms of IP and removes some of those future expenses.”
Anthony DiClemente, Barclays Capital: Reiterates an Overweight rating on Google and a $730 price target. “We view this as a highly strategic and defensive acquisition for Google as it would include ownership of 17,000+ approved and 7,500 pending patents. Google expects the acquisition to be marginally accretive in its first year and given low interest rates, Google’s $39+ billion in cash as of 2Q, and the strategic importance of Android longer-term, we are hopeful on the acquisition, although integration risks are high.”
Jamie Townsend, Town Hall Investment Research: “While we believe the decision by Google to enter the mobile hardware business to be a mistake, we also believe that the company’s choice to be a poor one as well. If Google’s primary goal has been to facilitate advertising on mobile devices through the growth in Android, than taking on one of the device vendors would seem to run counter to that approach. In our view, the major appeal of Android has always been its independence from the device vendors. That will no longer be the case.” Townsend thinks the “focus” on Android by partners Samsung Electronics (SSNLF) and HTC is “now at risk,” though, unlike Canaccord Genuity’s Mike Walkley, whom I quoted earlier, he doesn’t see much lift for Microsoft’s Windows Phone 7 as an alternative, given that Microsoft is “already firmly in bed with Nokia (NOK), another competitor.” To the extent it hurts the momentum of Android, the deal may be a slight positive to Apple, he thinks.
Mark McKechnie, ThinkEquity: Microsoft’s Windows Phone now becomes “the only true open OS,” and there’s a slight benefit to Microsoft and Apple (AAPL) ecosystems. “On the margin, we see GOOG’s ownership of MMI as a negative to the overall Android ecosystem as the IP gained by Android is offset by GOOG’s indirect entry into hardware. This puts GOOG in competition with key Android partners including Samsung and HTC. Although GOOG went out of its way to stress that Android will remain open, we suspect some pushback from key partners.” McKechnie says there’s no change in his view of Research in Motion’s (RIMM) BlackBerry and QNX operating systems, as they remain “closed” platforms, in his view. There’s a slight positive impact for Qualcomm (QCOM) as “Qualcomm’s SnapDragon is the only approved apps processor for WP7, but in general, we view market share shifts amongst OS vendors as neutral to QCOM.”
Yun Kim, Gleacher & Co.: Reiterates a Neutral rating on Google shares. The deal is expensive but necessary, writes Kim. “In our view, Android has already achieved its initial goal of accelerating adoption of smartphones in the marketplace, which leads to greater volume of mobile search. This trend indirectly benefits GOOG. Currently, Android does not generate any meaningful revenue stream for the company. Given the level of new investment in protecting its Android franchise, we believe investors are likely to expect more direct monetization strategy of Android, which the company has yet to clearly articulate.”