Lenovo Group Ltd; market cap (as of 07/11/2014): HKD106.78bn

Google Inc.; market cap (as of 07/11/2014): $365.90bn

On October 30, 2014 Lenovo (HKSE: 992) and Google (NASDAQ: GOOG) announced the completion of Lenovo’s acquisition of Motorola Mobility from Google for $2.9bn. The total purchase price includes $660m in cash, $750m in Lenovo ordinary shares and another $1.5bn in the form of a three-year promissory note. Lenovo is a Chinese multinational computer technology company with headquarters in Beijing, China and Morrisville, North Carolina, US. Lenovo’s business is based on product innovation, highly efficient global supply chain and strong strategic execution. Indeed, in 2005 the company acquired IBM’s Personal Computing Division and its notable PC brand, which contributes to Lenovo to become the largest PC maker worldwide and an emerging PC Plus leader.

The acquisition of Motorola Mobility includes the MOTOROLA brand and Motorola Mobility’s portfolio of innovative smartphones like the Moto X and Moto G and the DROIDTM Ultra series. In addition, Lenovo will own the future Motorola Mobility product roadmap.

The target of the acquisition is to diversify Lenovo’s business and to strengthen its position in the smartphone segment. By gaining market presence in North America, Latin America and Western Europe, the deal will give Lenovo a beachhead to compete against Apple, Samsung Electronics and other aggressive Chinese smartphone makers in the US market. Provided that, in the US, Chinese companies operate with low brand awareness, because perceived as inferior quality products’ makers, Motorola Mobility’s brand will be fundamental for Lenovo to gain credibility, brand and market recognition faster than its competitors.

At first glance it appears that Motorola was just another failing mobile phone manufacturer, which simply wanted to sell off its sinking business, Google stepped in thinking it could do a better job, but ultimately failed taking a large loss in value. However, the truth appears to be much more subtle and strategic on the part of Google.

Motorola Mobility, the maker of the first commercial cellphone, was Google’s biggest acquisition by far and it was considered a bet, which the company was more than willing to make. Yet Motorola has continued to lose money, troubling shareholders and stock analysts. Moreover, its new phone Moto X did not sell as well as expected, falling behind rivals such as Apple and Samsung.

Motorola is going to be sold to the Chinese company Lenovo for $2.91bn, which is 76% less than what was paid for the acquisition of Motorola Mobility two years ago. However, for the extremely wealthy Google the deal does not represent a total financial loss. Through the sale of Motorola Mobility, not only is Lenovo going to be turned into a factory for Google’s Android operating system and expand it globally but also Google will retain 15,000 of the 17,000 patents it acquired as part of its original deal for Motorola. Furthermore, Google will grant Lenovo a license to use some of its patents. In fact, analysts have described the patents as the most valuable part of the acquisition, worth several billion dollars alone because they represent Google’s main weapon to defend its Android mobile operating system.

According to the CEO of Google, Mr. Page, the sale of Motorola will allow Google to focus more intensely on innovating its core competencies such as designing software and selling ads. Quoting Collin Gillis, an analyst at BGC Partners – “They make their money from people watching YouTube ads and doing searches. They don’t necessarily need to be the hardware maker.”

Lenovo’s advisor was Credit Suisse Group, while Google was advised by Lazard Ltd.

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