Having had 24 hours to digest the Google-Motorola deal, we’re ready to deliver a verdict:Unless Google quickly sells off Motorola’s hardware businesses, the deal will be a colossal disaster.
- Google is a massive global software company with huge profit margins, genius engineers, extraordinarily high pay scales, and a near-monopoly on the most amazing advertising business the world has ever seen.
- Motorola is a has-been, low-margin, global hardware-manufacturing business that operates at break-even, has 19,000 employees–19,000! Motorola, in other words, is a VAST company, one that will increase the size of Google by a staggering 60+%. Mergers of this size rarely work well (or smoothly), even when managed by companies that are very experienced at making huge acquisitions (which Google isn’t).
- Motorola does not have dominant share of the key businesses Google is buying: smartphones, tablets, and TV gadgets. This means is does not have the weight necessary to push anyone around. For example, Motorola only has a small slice of market share (10%) in its key business (smart-phones). It’s nowhere in tablets. The only way to make decent money in the hardware business is to have real leverage, and Motorola doesn’t have it.
- The only thing that Google and Motorola have in common is that they are loosely considered “technology” businesses. This is not enough commonality for a massive merger like this to be a success without heroic integration efforts. (Think AOL-Time Warner).
- Google has no idea how to run a global hardware manufacturing business. (This is not a knock on the folks at Google, and it does not mean the folks at Google are stupid. It just means they don’t know how to run a global hardware manufacturing business.)
- The global hardware manufacturing business is so brutally tough that even companies that know how to run global hardware manufacturing businesses don’t do it very well–Exhibit A: Motorola.
- Motorola is way too big to serve as just a laboratory for Google’s phone, tablet, and set-top box ambitions. If Google wanted a lab for those things, it should have set up a single factory somewhere and started cranking them out.
- Merely “operating Motorola as a stand-alone business” will soak up considerable Google management time and attention. The good people at Motorola, the ones who are now selling their stock to Google at a 70% premium, will either need to be paid huge dollars to stay or will leave for more exciting opportunities than being an ugly stepchild division of a gleaming global software company.
- 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. 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-organising global supply chains, killing products, parachuting in trusted Googlers, and so forth. Who at Google is going to do that?
In short, the most likely scenario here is that Motorola’s business will begin to deteriorate quickly–if not now, the moment Motorola management takes their eyes off the ball. As long as they can get the deal closed, Motorola management will get their big payday, and some of them may even get it beforehand (if they’re allowed to sell the stock that has popped on Google’s bid). After that, they’ll have little incentive to knock the cover off the ball.
Even if Google runs Motorola as a stand-alone business, they will have to find a true genius to run it–and as evidenced by the struggles of many other global hardware manufacturing businesses, these folks are in short supply. And this genius will have a ton of work to do just to get Motorola running smoothly and “Google-ized” before he or she can even begin to fiddle around with Google’s cool new product ideas. This work will involve vast layoffs and restructurings. It will also take time.
If Google is not very successful at this integration, Motorola’s business will quickly deteriorate and begin to drag on Google’s financials. Google’s financials are extremely strong, so investors may well overlook this for a while. But they won’t overlook it forever. And as they begin to bitch about their once-gleaming software yacht suddenly being dragged down by a global hardware manufacturing anchor, the Motorola “distraction” will grow.
And, eventually, it’s not inconceivable that it will end up the same way the disastrous AOL Time Warner merger did: With a quiet spin-off after years’ worth of value destruction.
But maybe Google CEO Larry Page foresees all that–and plans to spin off Motorola’s hardware business the instant he gets the deal approved.
We can only hope.
But as we’re hoping, we should bear in mind that Larry Page has long been vocal about the idea that Google will have to make massive game-changing bets if it wants to stay on top.
A couple of years ago, Larry’s big-game-changing obsession seized on green energy, and this led to Google plunging into the wind-farm business.
More recently, it locked onto self-driving cars.
Fortunately for Google shareholders, both of these distractions have remained relatively tiny pet projects, and Google’s core business has remained strong.
But integrating a massive global hardware business is not a tiny pet project, nor is the idea that Google might now go head-to-head with Apple in the market for integrated tablets, phones, and TV gadgets.
So we say again: If all Larry really wants in the Motorola deal is that bag of patents and plans to spin off Motorola’s operating business immediately, fine. Even this will be tough to execute–getting approvals for the deal will take months if not a year or more–but it’s a manageable challenge.
But if Larry plans to keep Motorola and operate it as a stand-alone business, as Google said on the conference call yesterday, look out. This deal could easily end up in the same Hall of Shame that enshrines AOL Time Warner and many more of the worst mergers in history.