6 ms·

Standard & Poor's gives Google the U.S. debt treatment

47 points by abennett 15y ago

joelhaus 15y ago
Scott Kessler, the S&P equity analyst, gave an interview about the downgrade to Bloomberg West today: http://www.bloomberg.com/video/74044556/ http://www.bloomberg.com/video/74044556/ His justification was as follows: 1) Google will not be able to close the deal by early 2012. 2) Current related litigation is not helped. 3) No one knows how much protection the patents will add. 4) Moto will have an adverse impact on financials going forward. At the end of the interview, Kessler comments that Google is making this move with a long-term view, while S&P is "obviously" looking at this transaction on a "micro-basis".
- enjo 15y ago
  2) I don't understand. Just the threat of Google launching that missile at Apple and friends has to severely curtail patent litigation. If Apple knows that Google will soon have the ability to deliver a haymaker of their own, they are MUCH more likely to negotiate a cease-fire.
  - joelhaus 15y ago
    #2 is probably in reference to the Oracle claims since the Moto patents are more focused on wireless technologies, at least that would be my guess.
- ma2rten 15y ago
  Your last sentence, made me think. We must not forget that this is short term investment advice. They are not saying that no one should ever buy Google stock again.
thezilch 15y ago
I'm not convinced that Google doesn't know the manufactoring nor device game. For one, they have designed and provisioned their own servers, racks, and data centers for "ever." As well, they have had their hands in building out both Nexus devices.
- bdonlan 15y ago
  Servers in a data center are a very different beast than portable devices. They also have far fewer regulatory restrictions than cell phones; you don't need to register your custom server with the FCC, after all.
  - olefoo 15y ago
    The unfortunate thing is that it's all too easy to imagine a scenario where you do have to get approval from a .gov regulator to put a server on the internet. Or worse, several of them. Your copyright license, your permit for attaching to the internet, your Homeland Security Virus Scanning permit, etc.
    - ma2rten 15y ago
      Man, it's the internet. Just put your servers in another country.
      - olefoo 15y ago
        Didn't work for Google in China all that well, did it now?
wtvanhest 15y ago
GOOG's market cap is $174B. A $12B cash purchase for Motorola Mobility Holdings Inc is not consequential to GOOG's balance sheet. (But it does seem like a big premium given that that price is above their 10 year high.) There is obviously integration risk, but I believe the integration risk is low compared with the potential upside. The reality of our world now is that almost everyone in every country living above poverty will own a smart phone. Buying Motorola gives GOOG the ability to capitalize in a different way than just search and whatever value they get from the patent acquisition is bonus. 5 years from now, this will be viewed as an intelligent acquisition which provided a lot of value to GOOG, but most likely not the way most people are looking at it today. *Scott's micro-basis is not a good way to look at this acquisition and by not looking at the big picture (mobile growth) he may have made a serious error.
- epistasis 15y ago
  12/174 =~ 7%, which is a significant amount of any company's market cap, and very consequential to the balance sheet. I've never heard of such a large integration that has ever worked in the tech field; what percentage of Motorola's employees would be hired by Google through their normal rigorous procedure? Large integrations have always been failures; this is definitely a bold move, but based on the history of these types of purchases elsewhere in the tech field, and the difference in corporate cultures, the best possible course would be to not integrate at all.
  - jdelsman 15y ago
    This is true, as well. In my short time (< 2 months) at Motorola in Beijing, I can tell you that very few of the "engineers" here would be hired at Google.
    - bane 15y ago
      Is that a bad thing or a good thing?
      - SoftwareMaven 15y ago
6ren 15y ago
The point about margins is perceptive. Hardware is a very different business.
- wtvanhest 15y ago
  Margin differences between industries are obvious to a Sell-side/buy-side analysts. The analyst in this case talks about the difference in margins like a lower overall margin for google would be bad. It won't be bad because Google will now have additional revenue (&profit) at that low margin and will be operating 2 different businesses. If anything is scary about this transaction it is the integration risk. Lower overall margins are not an issue for valuation. This particular sell-side analyst may be using a model which does not value the company in 2 pieces which will give him a lower valuation than it should. Google's new valuation should look like this: Google's business prior to acquisition + Motorola's valuation + additional gains or losses from integration/synergies = Google's new valuation. *also note that in finance valuations, the lower standard deviation of returns, the lower the risk premium so having Motorola may actually increase the valuation. On the other hand those buyers of google who wanted pure play search/cloud exposure may sell off google's shares.
  - rjd 15y ago
    I read the whole thing buy out as extremely ominous. The size of motorola mobility (if I read it correctly) was larger than Google. It has the potential to destroy Google from a logistical stand point, tie it up in so much red tape that it can't survive... or worse becomes a lame duck like Microsoft is now. Profit margins aside its extremely hard to join to companies together. Infact one of my friends from childhood is an HR consultant who specialises is assisting business merge. You wouldn't believe the crap he's told me, lets say fraud is generally everyones first order of business. If its like at any other company the people at motorola aren't going to be very happy with this new position and will try and take its parent company for all its worth before moving to a better position. I assume Google is going to start issuing commands and maybe merging or forcing joint teams with the R&D departments, thats going to make things very difficult at motorolas end. Productivity is going to decrease as communication issues arise. People at motorola will probably get annoyed at being dictated to, always being wrong for misunderstanding directives, and want to move on (like I said above will take Google for all they can while they do it). Theres a serious chance they will view Google as an ivory tower issuing commands whilst being out of touch of reality. Loyalty will plummet. Google is in for pain. Serious HR pain. A company that hasn't got a good record of dealing with things like that. Thats going to cost A LOT of money to work through.
digikata 15y ago
Why would Google necessarily care about their S&P rating? They have enough cash that they don't have to issue bonds, similarly with equity - I doubt it changes the dilution constraints to issuing new equities much. Short term debt? Nope, that cash again. Financial easing of big purchase deals? What banker is going to pass up working with Google?
- MattLaroche 15y ago
  This isn't about Google's bond-worthyness or financing corporate debt, but instead about their stock's perceived value. (The article talks about GOOG being rated "buy" versus "sell", not AAA or B which are bond terms.) S&P ratings do affect how Google will run the business: If Google's stock takes a hit, employees get restless and are more likely to look elsewhere for employment. Employees aren't always long term focused in stock prices. Google could use this as an excuse to buy back their own shares to drive up value.
- nl 15y ago
  Actually, Google did issue bonds earlier this year[1]. The interest they were paying was so cheap it was better than spending cash. They pay 1.25% for a 3 year bond, up to 3.625% for a 10 year bond. Theoretically I guess Google could care about their S&P credit rating (as opposed to this stock rating) if it made it harder for them to sell them in the future. Judging from how low the rate they had to pay on those bonds I suspect they wouldn't have any trouble selling them anyway. Their credit rating is very unlikely to drop while they are highly profitable and sitting on a pile of cash though. [1] http://www.reuters.com/article/2011/05/20/us-markets-credit-idUSTRE74J4NK20110520 http://www.reuters.com/article/2011/05/20/us-markets-credit-...
Eliezer 15y ago
These price targets are ridiculous. If S&P actually knows where prices are going, why aren't they running the world's largest hedge fund?
- ewanmcteagle 15y ago
  You must ask this question of every single piece of stock advice ever given freely or sold. If you knew about future price movements with some degree of accuracy, the least profitable thing you could do would be to tell others.
  - kurumo 15y ago
    That is not entirely correct. If you have already acquired credibility (somehow, doesn't matter how for the purposes of this exercise), your estimate or advice can (and frequently does) become a self-fulfilling prophecy. Knowing that a significant number of investors will follow your advice gives you information which can be used in the market. It then stands to reason that the most profitable thing you could do would be to give this advice to the maximum possible number of people.
    - extension 15y ago
      No particular reason the advice has to be accurate.
      - sliverstorm 15y ago
        accurate advice is more likely to come true, thus bolstering your credibility.
        extension 15y ago
        But the advice comes true because you gave it. This is the inherent flaw with the market at issue here -- it selects for consistency, but not accuracy per se.
- 15y ago
adjwilli 15y ago
Let's say Microsoft and Apple can only go after the handset makers for whatever reason, and they win. Thst means handset makes will drop Android for WP7 or MeeGo. Now that Google has is own cell phone manufacturer, it will still be able to produce an Android phone. Patents I'm sure are important too, but being able to control manufacturing is crucial if the handset makers bail.
- bluedanieru 15y ago
  I'm not sure how this works, but the Rockstar Consortium, or whatever nonsense, that bought up the Novell patents, provides legal cover against any entity outside of that consortium right? Google could conceivably provide something similar to Android partners.
gamble 15y ago
If Google really bought Motorola for the patents alone, we should expect massive layoffs as they wind down the phone manufacturing business. If, as many have speculated, Google actually wants to follow Apple into the integrated software/hardware market, then this is a bet-the-company decision that will either see Google mired in a failed merger on the scale of AOL/Time Warner, or if successful it will provide a growth engine for the next decade and badly-needed diversification. I think it's pretty hard to look at this deal purely from a technical analysis perspective, since no one except a handful of senior staff at Google really know what the plan is.
- jdelsman 15y ago
  This is true. The CEO of Motorola Mobility came on a conference call with us (here at Motorola in Beijing) and told us that they didn't really know much more than we did, and to stay tuned. They have told us to "refrain from gossip or speculation", as the deal is still very fresh and far from closed.
- enjo 15y ago
  It wouldn't surprise me at all to see them spin Motorola right back out into a separate entity. It would actually make a lot of sense. Google gets their patents and a very cooperative manufacturer, without the worry of managing Motorola day-to-day. That $12B will be quickly absorbed.
  - orky56 15y ago
    If this new Motorola entity is separate from Google and without patents (since Google would have them), this new Motorola Mobility would no longer have any leverage for itself and could easily fall prey to future patent lawsuits.

47 points by abennett 15y ago

Scott Kessler, the S&P equity analyst, gave an interview about the downgrade to Bloomberg West today: http://www.bloomberg.com/video/74044556/ http://www.bloomberg.com/video/74044556/ His justification was as follows: 1) Google will not be able to close the deal by early 2012. 2) Current related litigation is not helped. 3) No one knows how much protection the patents will add. 4) Moto will have an adverse impact on financials going forward. At the end of the interview, Kessler comments that Google is making this move with a long-term view, while S&P is "obviously" looking at this transaction on a "micro-basis".

enjo 15y ago
2) I don't understand. Just the threat of Google launching that missile at Apple and friends has to severely curtail patent litigation. If Apple knows that Google will soon have the ability to deliver a haymaker of their own, they are MUCH more likely to negotiate a cease-fire.
- joelhaus 15y ago
  #2 is probably in reference to the Oracle claims since the Moto patents are more focused on wireless technologies, at least that would be my guess.
ma2rten 15y ago
Your last sentence, made me think. We must not forget that this is short term investment advice. They are not saying that no one should ever buy Google stock again.

thezilch 15y ago

I'm not convinced that Google doesn't know the manufactoring nor device game. For one, they have designed and provisioned their own servers, racks, and data centers for "ever." As well, they have had their hands in building out both Nexus devices.

bdonlan 15y ago
Servers in a data center are a very different beast than portable devices. They also have far fewer regulatory restrictions than cell phones; you don't need to register your custom server with the FCC, after all.
- olefoo 15y ago
  The unfortunate thing is that it's all too easy to imagine a scenario where you do have to get approval from a .gov regulator to put a server on the internet. Or worse, several of them. Your copyright license, your permit for attaching to the internet, your Homeland Security Virus Scanning permit, etc.
  - ma2rten 15y ago
    Man, it's the internet. Just put your servers in another country.
    - olefoo 15y ago
      Didn't work for Google in China all that well, did it now?

wtvanhest 15y ago

GOOG's market cap is $174B. A $12B cash purchase for Motorola Mobility Holdings Inc is not consequential to GOOG's balance sheet. (But it does seem like a big premium given that that price is above their 10 year high.) There is obviously integration risk, but I believe the integration risk is low compared with the potential upside. The reality of our world now is that almost everyone in every country living above poverty will own a smart phone. Buying Motorola gives GOOG the ability to capitalize in a different way than just search and whatever value they get from the patent acquisition is bonus. 5 years from now, this will be viewed as an intelligent acquisition which provided a lot of value to GOOG, but most likely not the way most people are looking at it today. *Scott's micro-basis is not a good way to look at this acquisition and by not looking at the big picture (mobile growth) he may have made a serious error.

epistasis 15y ago
12/174 =~ 7%, which is a significant amount of any company's market cap, and very consequential to the balance sheet. I've never heard of such a large integration that has ever worked in the tech field; what percentage of Motorola's employees would be hired by Google through their normal rigorous procedure? Large integrations have always been failures; this is definitely a bold move, but based on the history of these types of purchases elsewhere in the tech field, and the difference in corporate cultures, the best possible course would be to not integrate at all.
- jdelsman 15y ago
  This is true, as well. In my short time (< 2 months) at Motorola in Beijing, I can tell you that very few of the "engineers" here would be hired at Google.
  - bane 15y ago
    Is that a bad thing or a good thing?
    - SoftwareMaven 15y ago

6ren 15y ago

The point about margins is perceptive. Hardware is a very different business.

wtvanhest 15y ago
Margin differences between industries are obvious to a Sell-side/buy-side analysts. The analyst in this case talks about the difference in margins like a lower overall margin for google would be bad. It won't be bad because Google will now have additional revenue (&profit) at that low margin and will be operating 2 different businesses. If anything is scary about this transaction it is the integration risk. Lower overall margins are not an issue for valuation. This particular sell-side analyst may be using a model which does not value the company in 2 pieces which will give him a lower valuation than it should. Google's new valuation should look like this: Google's business prior to acquisition + Motorola's valuation + additional gains or losses from integration/synergies = Google's new valuation. *also note that in finance valuations, the lower standard deviation of returns, the lower the risk premium so having Motorola may actually increase the valuation. On the other hand those buyers of google who wanted pure play search/cloud exposure may sell off google's shares.
- rjd 15y ago
  I read the whole thing buy out as extremely ominous. The size of motorola mobility (if I read it correctly) was larger than Google. It has the potential to destroy Google from a logistical stand point, tie it up in so much red tape that it can't survive... or worse becomes a lame duck like Microsoft is now. Profit margins aside its extremely hard to join to companies together. Infact one of my friends from childhood is an HR consultant who specialises is assisting business merge. You wouldn't believe the crap he's told me, lets say fraud is generally everyones first order of business. If its like at any other company the people at motorola aren't going to be very happy with this new position and will try and take its parent company for all its worth before moving to a better position. I assume Google is going to start issuing commands and maybe merging or forcing joint teams with the R&D departments, thats going to make things very difficult at motorolas end. Productivity is going to decrease as communication issues arise. People at motorola will probably get annoyed at being dictated to, always being wrong for misunderstanding directives, and want to move on (like I said above will take Google for all they can while they do it). Theres a serious chance they will view Google as an ivory tower issuing commands whilst being out of touch of reality. Loyalty will plummet. Google is in for pain. Serious HR pain. A company that hasn't got a good record of dealing with things like that. Thats going to cost A LOT of money to work through.

digikata 15y ago

Why would Google necessarily care about their S&P rating? They have enough cash that they don't have to issue bonds, similarly with equity - I doubt it changes the dilution constraints to issuing new equities much. Short term debt? Nope, that cash again. Financial easing of big purchase deals? What banker is going to pass up working with Google?

MattLaroche 15y ago
This isn't about Google's bond-worthyness or financing corporate debt, but instead about their stock's perceived value. (The article talks about GOOG being rated "buy" versus "sell", not AAA or B which are bond terms.) S&P ratings do affect how Google will run the business: If Google's stock takes a hit, employees get restless and are more likely to look elsewhere for employment. Employees aren't always long term focused in stock prices. Google could use this as an excuse to buy back their own shares to drive up value.
nl 15y ago
Actually, Google did issue bonds earlier this year[1]. The interest they were paying was so cheap it was better than spending cash. They pay 1.25% for a 3 year bond, up to 3.625% for a 10 year bond. Theoretically I guess Google could care about their S&P credit rating (as opposed to this stock rating) if it made it harder for them to sell them in the future. Judging from how low the rate they had to pay on those bonds I suspect they wouldn't have any trouble selling them anyway. Their credit rating is very unlikely to drop while they are highly profitable and sitting on a pile of cash though. [1] http://www.reuters.com/article/2011/05/20/us-markets-credit-idUSTRE74J4NK20110520 http://www.reuters.com/article/2011/05/20/us-markets-credit-...

Eliezer 15y ago

These price targets are ridiculous. If S&P actually knows where prices are going, why aren't they running the world's largest hedge fund?

ewanmcteagle 15y ago
You must ask this question of every single piece of stock advice ever given freely or sold. If you knew about future price movements with some degree of accuracy, the least profitable thing you could do would be to tell others.
- kurumo 15y ago
  That is not entirely correct. If you have already acquired credibility (somehow, doesn't matter how for the purposes of this exercise), your estimate or advice can (and frequently does) become a self-fulfilling prophecy. Knowing that a significant number of investors will follow your advice gives you information which can be used in the market. It then stands to reason that the most profitable thing you could do would be to give this advice to the maximum possible number of people.
  - extension 15y ago
    No particular reason the advice has to be accurate.
    - sliverstorm 15y ago
      accurate advice is more likely to come true, thus bolstering your credibility.
      - extension 15y ago
        But the advice comes true because you gave it. This is the inherent flaw with the market at issue here -- it selects for consistency, but not accuracy per se.
15y ago

adjwilli 15y ago

Let's say Microsoft and Apple can only go after the handset makers for whatever reason, and they win. Thst means handset makes will drop Android for WP7 or MeeGo. Now that Google has is own cell phone manufacturer, it will still be able to produce an Android phone. Patents I'm sure are important too, but being able to control manufacturing is crucial if the handset makers bail.

bluedanieru 15y ago
I'm not sure how this works, but the Rockstar Consortium, or whatever nonsense, that bought up the Novell patents, provides legal cover against any entity outside of that consortium right? Google could conceivably provide something similar to Android partners.

gamble 15y ago

If Google really bought Motorola for the patents alone, we should expect massive layoffs as they wind down the phone manufacturing business. If, as many have speculated, Google actually wants to follow Apple into the integrated software/hardware market, then this is a bet-the-company decision that will either see Google mired in a failed merger on the scale of AOL/Time Warner, or if successful it will provide a growth engine for the next decade and badly-needed diversification. I think it's pretty hard to look at this deal purely from a technical analysis perspective, since no one except a handful of senior staff at Google really know what the plan is.

jdelsman 15y ago
This is true. The CEO of Motorola Mobility came on a conference call with us (here at Motorola in Beijing) and told us that they didn't really know much more than we did, and to stay tuned. They have told us to "refrain from gossip or speculation", as the deal is still very fresh and far from closed.
enjo 15y ago
It wouldn't surprise me at all to see them spin Motorola right back out into a separate entity. It would actually make a lot of sense. Google gets their patents and a very cooperative manufacturer, without the worry of managing Motorola day-to-day. That $12B will be quickly absorbed.
- orky56 15y ago
  If this new Motorola entity is separate from Google and without patents (since Google would have them), this new Motorola Mobility would no longer have any leverage for itself and could easily fall prey to future patent lawsuits.