On 15th August Google announced it would buy Motorola Mobility for $12.5bn.
Motorola Mobility was the mobile phone arm of Motorola and was spun off from the parent company at the beginning of 2011.
Motorola Mobility’s 2010 annual report showed revenues of $11.46bn, net earning loss of $79k, and total assets of $6.2bn. Before Google’s announcement the market capitalisation of Motorola Mobility was around $7.3bn
The general consensus is that the acquisition is driven by the mobile technology patents which Motorola Mobility holds.
Mobile technology patents are becoming more significant as the Smartphone vendors compete with each other in terms of innovation and new capabilities. Patents could ultimately determine which mobile phone technologies and suppliers will dominate the market. Google’s interest lies in ensuring the success of it’s Android mobile phone operating system.
The figures show Google values these patents at around $5bn. Interestingly, Motorola Mobility’s 2010 annual report mentions the fact that it holds 17,000 granted payments but they are not valued on the balance sheet. In fact ‘Other assets’ are only valued at $697m.
Other companies which are sitting on these type of patents are having their values reviewed. Nokia’s share price has risen after this announcement from $5.35 to over $6, increasing market valuation by almost $3bn.
Unfortunately for Google, their share price has fallen from $564 to $539 since the announcement was made. This reduces the market capitalisation of Google by around $8bn. Their shareholders don’t seem to appreciate the value of the Motorola Mobility purchase.
News Corp has recently agreed to sell Myspace for $35 million. Myspace, the leading social network before the dominance of Facebook, was purchased by News Corp in 2005 for $580 million.
At time of acquisition Myspace was the 5th most popular web site world-wide. Less than one year later it was the 2nd most popular site and News Corp was claiming in Fortune magazine that Myspace represented the biggest growth opportunity the company had. A Multi-billion dollar valuation was speculated.
Five years down the line and the fast moving nature of the Internet, and in particular the rise of Facebook, has destroyed that value.
By contrast Facebook Has recently reported 750 million monthly users. In 2005 at the time of the News Corp Myspace acquisition Facebook’s monthly user number stood at 5.5 million.
So Myspace was 5 times the size of Facebook but News Corp could not keep pace with the subsequent growth of it’s competitor.
It seems like rate of growth is the key indicator for high speculative valuation. But it’s increasingly hard to drive further increases in valuation when the growth starts to slow or even plateau. So can Facebook maintain it’s dominance when it’s user numbers start to plateau (they can’t keep on rising forever). Or will it go the way of Myspace?
While reading Robert Frank’s ‘The Return Of The Economic Naturalist – How Economics Helps Make Sense Of Your World” I came across his comments on the AOL/Time Warner merger in January 2000
In Frank’s book he claims its the worst piece he’d ever written. This is probably a sensible statement given that the story proclaims the virtues of the $147 billion merger.
The following story in Dec 2009 brings the curtain down on the whole saga as the companies de-merge with combined total market values of around $38 billion.
The scale of the numbers are staggering. No other words for it. $100 billion of shareholder value lost in the space of 10 years in two companies.
The vast majority of the losses were attributable to AOL. At the time of the merger AOL shareholders held 55% of the combined company giving a market value of $80 billion. When spun off in 2009 AOL was valued at $2.5 billion.
Time Warner at the time of the merger was worth a mere $66 billion and when spun off was valued at $36 billion.
The fallacy around the deal was the dot com bubble of the year 2000. When everything Internet related had turned to gold and there were few concerns about valuations far exceeding the industry norms. The hope was Internet access combined with entertainment content was a one way bet. It turned out it was, except it went the wrong way.
We are now speculating that we have returned to another Internet bubble with incredibly high valuations for technology IPOs and acquisitions.
How do we spot a bubble? I think we just need to look out for the next AOL / Time Warner style merger.