Following Google's [NASDAQ: GOOG] $12.5B bid for Motorola Mobility [NYSE: MMI] on Monday, Standard & Poor's downgraded its opinion of Google from buy to sell on Tuesday and cut its 12-month target price to $500 from $700. S&P today released a 1000+-word explanation that boils down to its doubt that the patent acquisition will protect Google's Android.
"At best, we see a lot of uncertainties. At worst, we see many problems for Google and Android," wrote analyst Scott Kessler.
Google shares have dropped 13% since Monday compared to about 7% for the Nasdaq.
The acquisition is primarily about protecting Google's Android franchise with Motorola's patent portfolio, said to contain some 7,500 pending and 17K patents (and Motorola is known for aggressively defending its portfolio). Oracle is suing Google and its Android franchise for alleged patent infringement, and Apple has sued Samsung, targeting its Samsung Galaxy tablet, which runs on the Android platform and is possibly the iPad's only serious competition.
"Even if MMI's intellectual property would protect Android, we are not certain it would apply to these pending matters, which will advance and perhaps reach critical stages well before the transaction is completed," Kessler explained.
Only a month ago, S&P listed Google as a strong buy and had a AAA credit rating for the U.S. Now, Google is a sell and the U.S. is AA+. Neither move was well-received, and S&P appears to be feeling the pressure.
"The S&Ps downgrade of Google (GOOG) was even more idiotic than their downgrade of the United States," James Altucher, contributing writer for the Wall Street Journal, told LAUNCH via email. "GOOG's purchase of MMI amounts to (if it is done in stock, although it will be done in cash) amounts to less than 8% of GOOG's market cap. To bring down their price recommendation almost 30% again shows little understanding for basic math."
After the Google-Motorola announcement, Justin Post, an analyst with Bank of America Merrill Lynch, told WSJ that even though Google had suggested its partners were supportive of the deal, some Android partners would likely contemplate opening the door to Microsoft.
"With GOOG holding all the cards on the patents and potentially offering cheaper patent protection from their now 19,000 patents-strong portfolio it seems less likely that handset manufacturers will abandon the GOOG ship," Altucher says. "And where will they go? They can't go to AAPL. MSFT doesn't have an equivalent offering. And RIMM is the walking dead. GOOG is the only game in town and that game just got stronger."
Google went public precisely seven years ago today and saw its share price rise 17% on the first day, from $85 to $100.34. The Washington Post warned people not to buy into Google's IPO.
"If you want to own Google, wait until the dust has settled and the hype machine has moved on," Allan Sloan wrote.
Today, Google stock opened at $499.34.
"My guess is the S&P will be eating the same crow that the Washington Post is now eating," Altucher says. "The only problem is, in this business, nobody apologizes: they just move onto the next fear story and forget all about the carnage and misery they left in their wake."
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