After selling different business units and holding onto an array of patents, Google made a seemingly-sound business decision
Google selling off Motorola to Lenovo this afternoon came about as far out of left field as anyone could have imagined. On top of what this potentially means for the future of Motorola's products as well as Google's aspirations in the hardware business — two things we are far from understanding at this point — there's an interesting financial side to this deal.
Motorola was purchased by Google at the end of 2011 (with the deal closing in the Spring of 2012) for a pretty hefty $12.5 billion. That's a large delta from the $2.91 billion that eventually changed hands between Google and Lenovo today, but those two numbers don't quite tell the entire story.
Considering Motorola's handset portfolio and sales leading up to the point when it was sold to Google, the assumption was that a big chunk of that $12.5 billion was for the company's patent portfolio. Indeed, Google valued Motorola's vast array of patents at a sizeable $5.5 billion shortly thereafter. It makes sense then that Google chose to hold onto these patents when it eventually sold every other part of Motorola to Lenovo.
So $2.91 billion from Lenovo, plus $5.5 billion worth (to Google) of patents. That's $8.41 billion of value, which comes up short of the $12.5 billion it paid initially. But in the end, Google didn't finish the deal $4.09 billion in the hole — there's far more to this balance sheet.
Keep what you need, sell what you don't
First and foremost, Google's purchase of Motorola wasn't an instant throwing of cash into a dumpster. That $12.5 billion transaction instantly pulled $2.9 billion in cash from Motorola's coffers over to Mountain View — something that was undoubtedly factored into the purchase price. Google also picked up some favorable tax-deductible assets as well as the opportunity to amortize many of Motorola's capital expenditures, but considering that Android Central isn't an accounting firm, we won't factor these into our assessment.
In the months following its acquisition of Motorola, Google then quickly trimmed off the parts of the long-standing hardware company that it had no need for.
If you follow the math, Google at this point was about $1.235 billion ahead.
In December of 2012, Google sold off the entire set-top (or "home") division of Motorola to the Arris Group for a cool $2.35 billion. It makes sense that Google had little use for the portion of Moto that made cable boxes — despite speculation to the opposite — and at that price, it recouped a good portion of that initial $12.5 billion outlay.
In a much smaller but still significant transaction, Google sold Motorola's Chinese and Brazillian assembly plants to manufacturer Flextronics for about $75 million in April of 2013. As it turns out, those chains would have been somewhat redundant considering Motorola's move to using U.S.-based assembly for the Moto X.
If you follow the somewhat-rough math — nothing can be precise considering the fact that not all of these deals were done in cash — Google at this point was about $1.235 billion ahead on the Motorola deal if you still trust its $5.5 billion valuation of the patents to be true.
The cost of running Motorola
But of course Google-owned Motorola wasn't just sitting around collecting dust this entire time. When the two companies came together, Motorola was still producing handsets for countries around the world and carriers here in the U.S. It had about 20,000 employees at the end of 2011, and while that number quickly reduced to about 4,250 by the end of 2013, there were still great costs associated with running Motorola.
From Q2 '12 to Q3 '13, Motorola racked up $1.974 billion in operating losses for Google.
Then there's the Moto X and Moto G. Google spent millions in R&D, marketing and manufacturing for these two devices, the ones that were supposed to jumpstart Motorola's comeback in the smartphone space. Based on Google earnings reports, Motorola ran an operating loss of $233 to $527 million every single quarter it was under the Google umbrella.
From Q2 2012 (the first quarter Motorola was included on Google's earnings) to Q3 2013 (we'll hear Q4 2013 tomorrow), Motorola racked up $1.974 billion in operating losses for Google. And while that's not a gigantic number in the grand scheme of its greater business, it's pretty significant in the context of this sale. Also keep in mind that Google still didn't expect Motorola to return to profitability for several more quarters.
Taking that $1.974 billion away — you can't recoup those losses — from our previous assumption of Google being about $1.235 billion ahead, we see a modest loss on Google's acquisition of Motorola to the tune of $739 million after running the company for nearly two years. That's a dramatically lower number than anyone may have thought at first glance, and when you take into account the knowledge Google gained from running its own device hardware business for two years, I'd say it was a pretty darn good price to pay for an experiment.