IBM Servers and now Motorola Mobility : China’s two biggest technology deals in the space of two weeks

Whilst the jury of bloggers is still out debating whether Google’s sale of Motorola Mobility to Lenovo for just under $ 3bn is a smart move or the admission of a terrible flop less than two years after buying that company for $ 12.5bn, Lenovo’s double acquisition clearly signals an aggressive growth strategy, and yesterday’s move is intended to propel the company to become one of the leading global players in mobile technology.

Two consecutive acquisitions of this magnitude by one same Chinese giant are likely to have a non negligible impact on the American psyche.  The regulators will be having an interesting time sifting through the pros and cons before allowing Lenovo to walk off with their new prized possessions, although it is difficult to see on what grounds these two deals could be blocked.

Good Feng Shui Will Be Needed to Repeat the ThinkPad® Magic

Last week’s acquisition by Lenovo of IBM’s low end server business made obvious sense, in the footsteps of the very positive development of the ThinkPad® range since acquiring it on from IBM in 2005.  However, Motorola might be a different case, because the brand’s eroded equity had only recently been revived by Google after years of decline, and this was achieved by reinforcing the brand’s American identity and heritage, which had a very positive impact on Motorola’s market share in North and South America but did little for the brand’s performance elsewhere.

Manufacturing mobile sets in Texas might strike the right chord for American consumers, but poses a challenge in terms of production costs when the competitors’ operations moved to China or other low cost countries years ago… In that context, it is hardly surprising that Motorola’s losses were worsening year-on-year.

Lenovo will certainly leverage their manufacturing capability to generate significant cost synergies, but the determining factor for success once the issue of manufacturing costs has been addressed will be one of sales volume rather than margin per unit: will Motorola maintain its image in North America under Lenovo’s ownership and have the talent required to develop products capable of leading the category in terms of design and features?  The payback on Lenovo’s investment to shoehorn itself into the Americas’ large and lucrative mobile market assumes that the magic that occurred with the ThinkPad® can be repeated with the Motorola brand.  Let’s watch this pace during the next two or three years…

The Simplistic View

Some indiscriminate commentators are comparing in a rather crude way the $12.5bn paid by Google in May 2012, its largest ever acquisition, with the $2.9bn “bargain price” at which Motorola Mobility is now being sold to Lenovo.  This totally overlooks the fact that Google’s interest in Motorola was based on the many thousands of valuable patents owned by that company, the most important of which Google will retain, whereas Lenovo needs the equity of a strong brand to break into the American market.  Of course, we shall need a few years to determine with certainty whether this was a win-win deal, but it clearly has the potential to be one.

Considering the magnitude of Motorola’s losses, which add to the cost Google paid for that company in 2012, many will argue that the price paid for Motorola’s patents was too high.  But if we look at this from the other angle, what would have happened if Google had failed to acquire the patents they needed to ring-fence their Android platform which was being increasingly challenged in the courts?

Google Not So Dumb After All

I cannot be the only one to believe that these patents have a far greater strategic value in terms of securing Google’s future than they would have if they were sold and dispersed across other players on the market: a 50% rise in the share price over the past 10 months shows that in spite of the proliferation of comments and blogs ranting about Google’s senior management being out of touch with reality, there nonetheless seems to be a general consensus within the serious investment community that Google know their stuff and continue to be incredibly successful.  A corporation the size of Google is bound to suffer glitches here and there, or even a big knock on the chin; what really matters is that they are strong and resilient enough to overcome those challenges and continue their formidable progression.

Google ended 2013 with revenue up 22% on the previous year’s figure and could afford to acquire Nest Labs inc. for $3.2bn in cash two weeks ago, partly financed by shedding off Motorola Mobility.

By retaining the key patents in the Motorola deal and jettisoning the loss-making hardware side of the business which Lenovo has the scale to possibly turn around, Google is no longer a competitor to other manufacturers whose devices use Android, and can therefore focus on developing the broadest possible usage of its Android software.  Not such a bad idea for a company which has built its reputation and fortune on developing remarkable software …