The official SEC report on Google's Motorola acquisition is out. It outlines how Google bid against themselves and paid $4 billion more than the initial high-end target for bidding.
The Self-Bidding War
In July, Google started by floating the idea of buying Motorola for a high-$20s, low-$30s (per share) figure. On August 1st, an official bid of $30.00 per share was made. Over the course of the next week and a half, however, Google would make two additional bids – $37.00 and $40.00 per share – representing a full 33 percent increase from their initial offer, or $4 billion extra in total spent.
How did Google get into a bidding war when no one else was bidding? It started before Google even made its initial offer.
Google's Andy Rubin first approached Motorola in July, looking to purchase the company's patent portfolio. This attempt to expand mobile patent assets stemmed from a failed attempt to acquire Nortel's patent portfolio in April. However, Motorola CEO Sanjay Jha indicated that "that it could be problematic for Motorola Mobility to continue as a stand-alone entity if it sold a large portion of its patent portfolio," according to the SEC filing.
This prompted Google to look at buying the whole company rather than just its patents. Google then floated a low-$30s bid as an initial cap. On August 1, Google "sent a letter to the Motorola Mobility Board of Directors proposing an acquisition of Motorola Mobility by Google for $30.00 in cash per share." Motorola has approximately 299 million shares currently, so that bid equated to $9 billion.
In response, Motorola brought on Quatalyst Partners, an independent investment bank. It was a Quatalyst representative who contacted Google on August 5 and suggested a bid of $43.50 per share – or a total bid of approximately $13 billion total, according to the New York Times
Google upped their bid to $37.00 per share ($11 billion), but continued to push for a fast and confidential buy. Motorola and Quatalyst leveraged Google's intensity by declining the second bid and suggesting "a proposed price of $40.50 or higher." Google made the offer of $40.00 per share, or $11.96 billion. Added to the additional options and awards (approximately 29 million shares with alternate sources or pricing), we come to $12.5 billion – our final figure.
Did Google Overpay?
From the moment the $12.5 billion figure was released, analysts called the purchase an inflated buy, and the realization that Google's initial cap would have been would have been closer to $9.4 billion just affirmed that notion. After all, $40.00 per share was a 63 percent increase when compared with Motorola's last after-market trading value. But Google wasn't just buying a company.
More than anything, Google was buying patent protection. In the world of mobile, manufacturers are already signing patent licenses with Microsoft that cost $5 to $12 per unit, fighting battles against Apple, and Google themselves are involved in their biggest lawsuit yet with Oracle. In total, these lawsuits and licensing fees may cost Google and their partners billions of dollars, which explains why Google is willing to pay an inflated price.
Google was also buying Motorola's silence: They didn't want to get involved in a bidding war with competitors who could then use Motorola's patents against Android. By bidding against themselves, they removed the incentive to open the floor to public bids. It was an expensive move, but one that offered important legal protections and access to hardware technology in a key industry.