Lenovo's Motorola acquistion a good move for all parties

Lenovo’s acquisition of Motorola Mobility from Google looks like it could be a winning move for both firms. On one hand, handsets appeared to be a peripheral business for Google. The firm has its fingers in so many pies, from mobile operating systems to search, wearables, connected cars and robotics. And the Motorola handset business has been bleeding cash since the acquisition – in the past six quarters reporting operating losses totalling $1.455bn.

As Google CEO Larry Page explained upon the announcement of the Lenovo deal: “The smartphone market is super competitive, and to thrive it helps to be all-in when it comes to making mobile devices.”

Google overhauled the business’ management team, replacing Sanjay Jha, who as CEO revived Motorola’s devices business and led the company through its acquisition by Google, with Google veteran Dennis Woodside, who had overseen integration planning for the acquisition and previously served as president of Google’s Americas region. The search engine giant also recruited Apple’s former chief evangelist Guy Kawasaki to act as an advisor at Motorola Mobility. Kawasaki’s role at the firm was focused on product design, user interface, marketing and social media.

But in August 2012, the firm made an effort to streamline operations on the back of continual quarterly operating losses, announcing plans to axe around 4,000 staff from Motorola Mobility’s workforce. The figure represented 20 per cent of the handset business’s total headcount and two-thirds of the redundancies were made outside of the US.

In addition, Google shut down 94 facilities – which represent around a third of the handset firm’s worldwide offices – as the firm continued to overhaul its $12.5bn acquisition.

However, admitting defeat in Google’s attempt to grow a formidable handset player, CEO Page said the firm believes that Motorola “will be better served by Lenovo—which has a rapidly growing smartphone business and is the largest, and fastest-growing, PC manufacturer in the world”.

The move will enable Google to devote energy to driving innovation across the Android ecosystem, he added.

And Google keeps its hands on what it originally wanted, not the handset business, but the patents that Motorola Mobility had to its name, which is what the firm spent the majority (around $9.59bn) of its $12.5bn investment on.

“The deal with Lenovo confirms that Google’s main interest in buying Motorola was its patent and IP portfolio because the company will retain the “vast majority” of patents as part of the deal,” said Ian Fogg, director of mobile and telecoms and head of mobile at research firm IHS.  He added that Lenovo will have a license to all intellectual property and will gain over 2,000 patent assets.

Fogg added that by divesting itself of Motorola Mobility, Google can create a more simplified business environment.

“It removes the channel conflict with other Android smartphone makers because Google will no longer have its own competing smartphone hardware division. Like Apple, Nokia, and Palm before it, Google has failed to balance the competing business demands of distributing operating systems while also making hardware. Where those companies chose to downplay their OS licensing business in favour of their own hardware play, Google did the opposite and sacrificed Motorola.”

As a buyer of Motorola Mobility, you would be hard pressed to find one more appropriate than Lenovo. The Chinese firm has been encouraged by Motorola’s ability to generate revenue; $4.7bn in the four quarters to September 30, 2013. Perhaps the biggest strength for the Chinese firm’s handset business is its performance in China, where it claims to be the number two phone manufacturer and we have seen this week with Apple, that the Chinese market is one that can make or break a challenger in the smartphone market.

A major plus point for Lenovo is that Motorola Mobility has strong relationships with retailers and operators in North America and Latin America, which Lenovo does not. In China, Lenovo said it has 11.8 per cent market share and one per cent in Asia Pacific excluding Japan.  It also has a 0.5 per cent market share in EMEA excluding Western Europe.

Meanwhile, according to Lenovo’s figures, Motorola Mobility has an eight per cent market share in Latin America and 3.5 per cent in North America – hardly a majority, but a foothold for Lenovo at least.

“Lenovo will gain a strong market presence in North America and Latin America, as well as a foothold in Western Europe, to complement its strong, fast-growing smartphone business in emerging markets around the world,” Lenovo said in a statement.

The deal does not mean that Google turned its back on the hardware market altogether, indeed it is still very much focused on its wearable technology project Google Glass as well as pushing its connected cars vision. The firm also acquired Nest Labs for $2bn earlier this month. The cloud-enabled thermostat and smoke detector startup was founded by iPod creator Tony Fadell, for £2bn ($3.2bn).

Commenting on the Motorola divestment, CEO Page stressed that “this does not signal a larger shift for our other hardware efforts.

“The dynamics and maturity of the wearable and home markets, for example, are very different from that of the mobile industry. We’re excited by the opportunities to build amazing new products for users within these emerging ecosystems,” he said.