Google (GOOGL, Financial) just sold Motorola Mobility, one of its worst acquisitions ever, to Chinese tech giant Lenovo (LNVGY, Financial) for $2.9 billion -- a steep discount from the $12.5 billion it had paid for the company back in August 2011.
Lenovo gets the entire Motorola brand, including the recently launched Moto X and Moto G handsets, as well as more than 2,000 patent assets. Google, however, will retain the majority of the Motorola's original patent portfolio. There are doubts regarding Lenovo's ability to revive the Motorola brand, which at its peak (2006) accounted for 22% of the mobile phone market, but I truly believe that Lenovo will do a much better job than Google at rebuilding the fallen brand's reputation in the mobile marketplace.
Reasons Why Lenovo Bought Motorola
Lenovo is one of the world’s top five smart phone makers, but its market share in the U.S., one of the world's largest smartphone markets, is zero. Motorola has an 85-year history in the U.S. and, at this point, pretty poor distribution elsewhere.
The company's biggest business is still PCs, and it's world’s No. 1 PC maker. But PC sales aren’t growing. If Lenovo is going to be a technology leader in the late 2010s, it needs to be a mobile tech leader. Assembling a global smartphone business is key.
Getting into the U.S. market is all about relationships with U.S. carriers. Motorola's relationships are really, really good: it has the ongoing Droid deal with Verizon (VZ, Financial) Wireless, and it's placed the Moto X on three out of our four national carriers.
Lenovo doesn't just want to be a consumer smartphone maker. It has very strong enterprise relationships with its ThinkPad and ThinkCenter products. By now also offering phones, it can deliver full technology packages to its U.S. business clients.
In the face of a shrinking PC industry, Lenovo knew that it would have to enter new markets in order to sustain revenue growth. That's why the company decided to manufacture smartphones, inspired by the massive success of Apple and Samsung. At the same time, Lenovo got interested in manufacturing and selling low-end servers as a way of entering the huge market for enterprise technology.
Aiming to replicate its PC success in the smartphone world, the company adopted an aggressive pricing strategy, which -- combined with high quality standards in product design and manufacturing -- allowed Lenovo to quickly capture market share in emerging economies like China. This helped the company to become the world's fourth-largest smartphone maker, according to IDC Research.
Reasons Why the Deal May Prove Successful
Firstly during its two years under Google, Motorola was heavily restructured and much of the fat cut away. It is still losing money, but the company is in far better shape going forward.
Secondly Google’s control has done a lot for Motorola’s handsets. Whereas previously a mishmash of RAZRs and DROIDs flooded the market in all shapes, sizes and varying degrees of pointlessness, now the company is focused around two thoroughbreds: the Moto X (above) and Moto G. Critical acclaim for the former has outweighed commercial success, but the company is on the right foot. It is also providing a near-stock Android experience to its customers and delivered the Android 4.4 KitKat update to its handsets months ahead of its rivals.
Consequently Lenovo has inherited a company with brand awareness, acclaimed handsets and 6% of the global smartphone shipments which it can strap to its own burgeoning smartphone and tablet business in the East. This will make Lenovo the world’s third largest smartphone maker by volume.
The acquisition of Motorola Mobility will strengthen and accelerate Lenovo's penetration in the U.S and global smartphone markets. Motorola offers Lenovo a wide range of popular mobile devices that fit well with the company's current pricing strategy. Lenovo's array of mobile devices, with Motorola's brand presence in mature and emerging markets, will add pressure on current market leaders' regional sales and market share.
As the dust settles on this deal, it’s clear that Google took a large loss on its venture with Motorola Mobility. Google acquired an established brand with a vast portfolio of patents, a mature distribution system and a knowledgeable manufacturing arm. Even after pouring money and resources into the historic American brand, Google couldn’t make lemonade with Motorola. Maybe Lenovo, the now-leader in personal computers, will have better luck.
Lenovo, meanwhile, could conceivably jump-start its smartphone ambitions with the purchase of Motorola. As the inventor of the cell phone, Motorola has a rich legacy and a still well-known brand that Lenovo could exploit. Lenovo is now a major player and it is noticeable Google has taken $750m of Lenovo stock options as part of the Motorola sale. If history tells us anything, it is Google rarely backs a loser.
"The acquisition of such an iconic brand, innovative product portfolio and incredibly talented global team will immediately make Lenovo a strong global competitor in smartphones," Lenovo CEO Yang Yuanqing said in a statement.
In the end, however, what this is all about is Lenovo gaining an instant brand in the mobile world -- outside of China. Lenovo will have no problem immediately entering into partnerships with both AT&T and Verizon. At first, they very well may continue to push the Moto X and Droid devices; but eventually, I believe they will shift that line up to spotlight Lenovo-branded smartphones that could easily usurp the crown of the current kings and queens of mobile devices.
Google's Motorola offers Lenovo an opportunity to access the U.S smartphone market and build its mobile brand outside of China.