[Includes Analysis]

Google Inc. (NASDAQ: GOOG) signed a deal to acquire Motorola Mobility Holdings, Inc. (NYSE: MMI) for $12.5 billion.

The sale of Motorola for $40.00 per share in cash, a premium of 63% to the closing price of Motorola Mobility shares on Friday, Aug. 1, will enable Google to supercharge the Android ecosystem and will enhance competition in mobile computing, according to a statement by both parties.

Larry Page, CEO of Google, said, "Motorola Mobility's total commitment to Android has created a natural fit for our two companies. Together, we will create amazing user experiences that supercharge the entire Android ecosystem for the benefit of consumers, partners and developers. I look forward to welcoming Motorolans to our family of Googlers."

The transaction is subject to receipt of regulatory approvals in the U.S., the European Union and other jurisdictions, and the approval of Motorola Mobility's stockholders.

The transaction is expected to close by the end of 2011 or early 2012.

Arming Up in the Patent War

With $39 billion in cash and marketable securities in its books as of June 30, search giant Google's $12 billion purchase of Motorola is not surprising.

When Google lost in the bidding for 6,000 patents of defunct telecommunications firm Nortel Networks, Google complained that the winning bidders were planning to use the patents to block Google and other users of the Android platform from bringing new products to market.

After all, entities like iPhone maker Apple Inc., Blackberry vendor Research in Motion Ltd. and operating systems giant Microsoft Corp., grouped together and came up with $4.5 billion (over $1 billion more than Google's final offer) to stop Google from owning those patents. Those entities are not using Google's Android operating system.

While the Android platform has emerged as the top operating system for smartphones -- now taking more than 40% of the market -- it has been on the defensive side in patent litigation. Google has been sued by Oracle, and Android users like Samsung and HTC have been targeted by Apple in suits.

Google is still new in the smartphone industry and does not have a trove of patents to defend itself from intellectual property lawsuits.
Google patent portfolio pales to what like Nokia, Apple or Motorola has.
Yes. Motorola.

Motorola's Patents

While Motorola is not even among the top five smartphone vendors this year, it used be one of the largest cell phone makers.
In the mid-1990, Motorola dominated the analog cellphone market, with its StarTAC flip phone, but later losing the crown to Nokia when phones became digital. In 2004, Motorola recovered its dominance in the market after releasing one of the all time bestsellers, the RAZR V3 product line. Motorola was sent away from the limelight after Apple in 2007 started releasing its iPhone touch-screen, no-keypad phones.

Billionaire Carl Icahn, a shareholder of Motorola Mobility, said last month that Motorola has valuable intellectual property, and the phone maker should explore alternatives regarding the patent portfolio, amid Motorola's struggles to boost smartphone sales.Icahn said Motorola's patent portfolio, which is substantially larger than Nortel Networks' and includes numerous patents concerning 4G technologies, has significant value... "given the current heightened market demand for intellectual property in the mobile telecommunications industry."

Motorola has more than 17,000 patents on phone technology.

Possible Conflict

What if Intel Corp., the supplier of chips for most desktop and laptop makers, starts selling its own PCs? Will it provide the fastest processors for its own PCs and supply inferior chips for other PC makers relying on Intel? Or will Intel be forced to provide the same superior processors to the other PC makers?

While Google has assured that the Android will continue to be open source, and thus available to other smartphone makers, questions remain as to how Google will beef up its newly owned Motorola when the Android platform is also being 'freely' made available to Motorola's rivals. Aside from Motorola, other firms like Samsung Electronics, HTC, and LG Electronics Inc. are part of the "open handset alliance" and have been using the Android for their smartphone and tablet devices.

Andy Rubin, senior vice president of Mobile at Google, said, "We expect that this combination will enable us to break new ground for the Android ecosystem. However, our vision for Android is unchanged and Google remains firmly committed to Android as an open platform and a vibrant open source community. We will continue to work with all of our valued Android partners to develop and distribute innovative Android-powered devices."

Motorola Mobility will remain a licensee of Android, and Android will remain open. Google said it will run Motorola Mobility as a separate business.

While Google has its assurances, Google won't no longer be the software provider for Apple's rivals, it has also become a smartphone vendor.

Aftermath

The Google/Motorola deal is expected to reshape the smartphone industry.

After losing market share in the past two years and its stock price eroding, Nokia Oyj has been a target of takeover rumors. Nokia is retiring its Symbian platform and has inked a partnership with Microsoft to provide the Windows OS in Nokia phones. As the Windows-based phones are yet to be released, Nokia sales have slumped and shares have dropped 45 percent since the start of the year.

Today's deal "could prove to be a massive catalyst for the Windows Phone ecosystem," said James Etheridge, a spokesman for Nokia.

Prior to the Google/Motorola deal, Nokia's market capitalisation was only $14 billion. With the premium Google is paying for Motorola's shares and given that Nokia has a patent portfolio stronger than Motorola's, Nokia saw its stock rise more than 10% following the announcement of the Google/Motorola deal. "This price should ring bells on how low Nokia shares currently are. And if you think of patents, now Nokia is the one with a really strong patent portfolio," said Swedbank analyst Jari Honko, according to the Chicago Tribune.

J.P. Morgan analyst Rod Hall, the Tribune relates, said in a note to clients that Nokia as well as RIM could benefit from potential confusion and competition among phone makers using Google's Android software.

While a Google-Motorola combination could be a bigger threat to the struggling smartphone makers, the deal also lifts the valuation on the patents held by RIM and Nokia, according to The Wall Street Journal. Also, the two -- which don't make Android phones -- are immune to any possible Android pullback by Google, The Journal said.

With Google now taking Motorola; Nokia partnering with OS giant Microsoft; Apple just having emerged as the number one smartphone vendor the second quarter; and Samsung becoming a top smartphone seller following an Android alliance with Google, things are getting more interesting everyday in the smartphone industry.

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