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TheStreet Open House

Apple Forcing Google to Favor Motorola IP Over Android Profits

NEW YORK ( TheStreet) - When Google (GOOG) took the patent Cold War in Silicon Valley to a new level with a $12.5 billion bid for Motorola Mobility (MMI - Get Report) at an over 60% premium, shares rocketed to to near $40.

But deal-enriched Motorola Mobility shareholders should be wary of warnings signs from Google's regulators and customers that could cut those gains by half. In addition, its unclear whether the Motorola Mobility deal is a lost financial and competitive opportunity for Google.

"If for some reason the merger is disallowed, Motorola Mobility shares would probably trend back down to the low-$20s range where they were trading prior to the bid by Google," says Tavis McCourt of Morgan Keegan.

For Motorola Mobility investors, a Google merger fail might lead to a share slump because the company is unlikely to garner non-Google interest. In announcing its merger, the biggest in its history, Google acknowledged it would gain little from handset businesses acquired. Instead, Motorola Mobility's patents will allow Google to defend its growing Android ecosystem from intellectual property litigation by Microsoft (MSFT - Get Report), Apple (AAPL - Get Report) and potentially Oracle (ORCL - Get Report). "Motorola also has a strong patent portfolio, which will help protect Android from anticompetitive threats from Microsoft, Apple and other s ," said Chief Executive Larry Page when announcing the deal.

If competition concerns were to force Google to withdraw its bid, others won't line up to buy Motorola Mobility. "If the deal doesn't go through, I don't see any obvious buyer as interest in the IP portfolio would be high but nobody would take the burden of the actual business as Google did," says Pierre Ferragu of Sanford C. Bernstein.

Large Motorola Mobility holders like activist investor Carl Icahn and Farallon Capital Management would take a big hit if the deal were to breakdown. See Carl Icahn's portfolio and 5 Key Players in the Mobile Payment Wars for more on Motorola Mobility and Google.

Potential competition concerns are indirect. Google's Android smartphone operating system is a tremendous success, so much so that the company gives it away and still makes money. Google open sources its operating system freely to handset makers like Samsung, LG (PL), HTC and Motorola Mobility in a push to drive Android adoption that will bolster revenue in adjacent search businesses.

In the U.S., Google's Android market share has more than doubled in a year as of the third quarter to 57%, according to data firm IDC. Meanwhile, Research In Motion's (RIMM) Blackberry has given up share and rollouts like HP's (HPQ - Get Report) WebOS came to the market dead-on-arrival. Even Apple's (AAPL - Get Report) iOS has lost share since 2010.

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