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Wednesday, August 17, 2011

Googlerola - Quick Analysis

8:43 PM Posted by Deepak Nayal 2 comments
I had thought that I will not use my laptop for the two weeks that I am vacationing, but it is really hard to do so. We have got so used to being connected with the rest of the world all the time that it feels strange to not check your emails, social networks and browse the internet every now and then. I feel like a drug junkie who needs to keep getting his dose regularly. 

Last night when I opened my laptop and started browsing, guess what was the highlight of the day - Google acquiring Motorola Mobility. The net was full of news, reviews and comments on this topic. As expected there are a lot of yay- and nay-sayers. What I observed was that most of the people where talking about the success and failure of this move based on high-level topics like market and strategy. If you have been following my posts, you would know that I do not have a high opinion of such people. Some of these people are also the ones who had debated earlier whether Apple should acquire Facebook, just because it had the cash to do so, without giving a lot of thought to the more subtle and more important points, such as whether combining these two companies with different culture, direction and business models makes sense. 

There seem to be two clear motives behind Google acquisition of Motorola Mobility (MM). First, the recent failure that Google faced in the patent wars is clearly a strong motivator. Google needs more patents to safeguard its Android platform. And second, Google is trying to pull an Apple here. Google hasn’t made any money from Android growth yet, apart from the revenue from mobile phone searches. This acquisition will allow Google to finally make some money from the Android growth story. 

While looking at combined Google-Motorola might make sense from strategic and market level, it is the post-merger integration that is always the biggest problem in M&As. This deal is just bonkers considering the finer aspects. 

  • To begin with, Google has only done small bolt-on acquisitions till date. Integrating small companies into big ones is an easy task, but integrating two big companies is a huge problem. Google will increase its headcount by more than 60% with the Motorola Mobility acquisition
  • Google has a very different organizational culture than MM. It has a hardcore software-driven engineering culture, which is very different than what you would witness is most companies (including technical ones). Integrating the culture and processes of these two companies is going to take years, and will be the biggest headache. 
  • This deal also puts Google against its own partners. Big players such as HTC and Samsung are major stakeholders in the Android market. With this deal in place, Google is going to have a strange relationship with HTC and Samsung where they are going to be both, competitors and partners. 
  • These two companies also have very different business models. While Google is a high margin fast growing software driven business, MM is a much slower growing lower-margin hardware driven business. 
I believe that this acquisition is going to be a failure. In fact, S&P thinks the same as well, which is why they have downgraded Google to a sell rating. My guess is that Google, failing to integrate the two companies, will eventually sell MM in a loss. Steve Jobs must have chuckled when he had read this news. Let us see how things turn out in future. 

Now that I have scratched my itch for sharing my thoughts on this acquisition, I am going to go back to enjoying the last few days of my vacation.

2 comments:

  1. First of all I enjoyed reading your commentary, which reminded me of millions of discussion carried out in Cass. I agree with all the points raised by you which clearly suggest that this would be a failure of a merger. But I would not like to jump the gun just yet. The only entity which could make it work or not is Google. Its correct that this merger is just not right, but why is it necessary to have a merger? Why cant it remain just a superficial change in the ownership? The good thing about this acquisition is that MMI has already restructured and has a dynamic management with Sanjay Jha as CEO, and by all indications he should continue to lead the company. The way I think, the merger should not happen, this should only give Google a defense shield in the patent wars. Google should remain very careful not to step on toes of its partner OEMs and should use MMI to create new product categories, which would rather make other OEMs happy. As its been adequately established that ecosystem is the holy grail in technology business and till now its limited to apps running on my smartphone and tablets. Google along with MMI has the resources to grow this ecosystem to other levels, say connecting your car, house, home appliances etc. But someone has to take the lead. Till now only Apple has shown such gumption to move into completely unknown lands. Remember how most of the android phone OEMs were happy to use lesser specs for the android smartphones and it took Google's Nexus initiate to open the doors for better devices. Similarly all the OEMs would be happy if Moto opens up new markets for them. $12.5 bn is a huge bet and Google is not a fool to expect it to give instant returns, this has to be a very long term strategic play by the search giant.
    But we would never know what will happen until the fat lady sings. So lets just wait and watch. Happy vacationing buddy.

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  2. The problem is that it cannot just remain a superficial change in ownership because now Motorola Mobility (MM) is going to contribute to Google's top-line and bottom-line. Though Google is saying that they will run MM as a separate entity, it is way easier said than done. The delta between growth and margins of these two companies is high, and it is going to bring down Google's financial performance a lot. One should not analyze this acquisition from market or strategic perspective only. Comparing Google-rola to Apple will also be a mistake because Apple built its hardware and software businesses internally, Google is buying MM - context matters; details matter. Most M&As fail due to problems in integration. The deal can go either way, but the odds of it failing are way more.

    PS - You are right. This reminds me of our Cass discussions

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