Google’s Monday morning Motorola bombshell has everyone scratching their heads, but S&P equity analyst Scott Kessler has one word of advice: Sell.
The S&P analyst cut his rating on the stock to sell from buy on Tuesday after this bit of analysis:
After further consideration of GOOG’s plans announced yesterday to purchase Motorola Mobility (MMI 38, Hold), we see greater risk to the company and stock. We expect the transaction to be consummated next year, but later than early ’12, which GOOG indicated. Moreover, despite MMI’s extensive and valuable patent portfolio, we are not sure it will protect Android from IP issues. We also believe the purchase of MMI would negatively impact GOOG’s growth, margins and balance sheet. Based on revised DCF analysis, we are cutting our 12-month target price to $500 from $700.
And, in case you hadn’t noticed, former stock analyst and Business Insider founder Henry Blodget thinks the deal has the potential to be a “colossal disaster” if Google doesn’t sell off Motorola’s hardware business.
Blodget notes that Google’s expertise is in software, not hardware, and that the handset business is a notoriously cut-throat one.
“Successfully integrating Motorola — and making the merger work — would require a world-class integration team, along the lines of the ones GE’s Jack Welch used to run,” he writes. “The m.o. of the GE integration team was to completely gut the acquired companies and replace them with GE managers, thus quickly ‘GE-izing’ the acquired companies. This type of integration for Motorola would involve firing thousands of people, shutting down factories, re-organizing global supply chains, killing products, parachuting in trusted Googlers, and so forth. Who at Google is going to do that?”
History is littered with examples of acquired companies disintegrating post-acquisition because the cultures and goals of both companies don’t fit.
In fact, ironically Google’s mobile chief Andy Rubin has had his own experience with this phenomenon.
Rubin co-founded the smartphone maker Danger, which made the T-Mobile Sidekick. It was widely hailed when it first came out. But then Microsoft acquired the company, and the next phone the unit produced, the Kin, was panned by the tech trade press and quickly killed.
So far, investors seem to buy both Kessler and Blodget’s analyses: The stock’s price has dipped by slightly more than three percent to $536.76 after the announcement.
