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NEW YORK (Dow Jones)--Google Inc. (GOOG) agreed to acquire Motorola Mobility Holdings Inc. (MMI) for about $12.5 billion, a deal that spells the end of independence for a venerable American company and reshapes the booming market for smartphones as computing shifts from the desktop to mobile devices.
The deal gives Google--which has spurred widespread adoption of its Android mobile operating system by licensing it freely to mobile phone makers--its own in-house hardware operation, potentially enabling it to challenge rival Apple Inc. on better terms but also raising questions for partners like Samsung Electronics Co. (005930.SE), HTC Corp. (2498.TW) and LG Electronics Inc. (066570.SE).
It also gives Google ownership of a huge trove of patents that it will be able to use to defend itself amid an increasing fierce war over intellectual property among technology companies.
More fundamentally, however, the deal further hardens the battle lines in the mobile business. Apple already operates what some call a "walled garden" of operating software, mobile applications and devices like the iPhone and iPad. Earlier this year, Microsoft Corp. cut an extensive deal with Nokia Corp. that will see the world's top mobile phone maker adopt its Windows mobile operating system for smartphones.
Now, Google too will be closely aligning hardware and software.
Google executives said on a conference call that the acquisition will help protect the Android operating system from patent threats. The company also offered assurance the deal won't affect its relationships with handset-making partners that use Android.
"With mobility continuing to take center stage, the combination with Motorola Mobility is an extremely important event in Google's evolution," Google Chief Executive Larry Page said.
He added that Motorola Mobility has an "exciting product roadmap" and is poised for "tremendous" growth. In addition, its "strong" patent portfolio--which Motorola Mobility's Jha pegged at 17,000 patents and over 7,500 applications pending--should help protect Android from competitive threats by Microsoft, Apple and other companies.
Motorola Mobility shares soared 57% to $38.41, approaching the offer price of $40 a share, which is a 63% premium to its Friday close. Google shares fell 1% to $557.99.
Google expects to complete the transaction by early 2012, and it's been approved by the boards of both companies. The deal has a reverse breakup fee of $2.5 billion in cash, according to The Wall Street Journal. The hefty amount may indicate some nervousness about the deal's regulatory prospects as Google has raised antitrust concerns with the Department of Justice.
Google Chief Financial Officer Patrick Pichette said the acquisition should "mildly" add to earnings, excluding amortization of intangibles, once the deal closes. He added Google still has "plenty of financial flexibility to pursue substantial future opportunities," which Google Chief Legal Officer David Drummond said could include the purchase of more patents.
"We've been saying for some time that we intend to protect the Android ecosystem," Drummond said. "It's under threat from some companies."
Before the deal, Google was considered to have a thin portfolio of wireless and telecommunications patents. It recently lost the bidding for Nortel Networks Corp.'s (NRTLQ) patent trove to a consortium of tech heavyweights such as Apple Inc. (AAPL) and Microsoft Corp. (MSFT). Meanwhile, Google and Microsoft have engaged in a war of words over their recent maneuvers in intellectual property auctions, underlining the heated tone of the market for such assets.
"The big thing it plugs for Google is: Google's patent portfolio is only a few thousand, and they have been the target of a significant amount of patent litigation," Evercore Partners analyst Alkesh Shah said. "Motorola's patent portfolio provides a very strong defense against all this litigation."
Google will run Motorola Mobility as a separate business that will remain a licensee of Android. It was not clear how the deal will affect Google's relationship with other Android partners, specifically HTC Corp. (2498.TW), LG Electronics Inc. (066570.SE) and Samsung Electronics Co. (005930.SE). In its press release, Google said things wouldn't be different.
"I spoke yetserday to, I think it was the top five Android licensees, and they all showed very enthusiastic support for the deal," said Andy Rubin, Google's senior vice president of mobile at Google.
Increased sales of devices running the free Android software have given Taiwan's HTC and South Korea's Samsung a shot in the arm after losing market share to Apple's iPhone handset. All three manufacturers, including LG, have said this year they will be boosting the output of Android-based devices.
HTC announced support for Google's acquisition, saying it will benefit from the promotion of Android phones and that its partnership will not be affected by the deal. Samsung and LG declined to provide an immediate comment.
The deal also could be seen as mixed news for Research in Motion Ltd. (RIMM, RIM.T) and Nokia Corp. (NOK, NOK1V.HE). While a Google-Motorola combination could be a bigger threat to the struggling smartphone makers, the deal also lifts the valuation on the patents held by RIM and Nokia. Also, the two--which don't make Android phones--are immune to any possible Android pullback by Google.
RIM shares rose 4.6%, while Nokia added 12%.
Gartner analyst Carolina Milanesi said the deal could be more of an issue for Google in the tablet market, where Android has struggled to compete with the Apple iPad. "With Windows 8 coming next year and H-P talking about possibly licensing WebOS, there are more possible alternatives in the tablet space," she said. "In the smartphone space, Android is too strong of a force to do without."
Meanwhile, Google had preliminary acquisition discussions with wireless technology developer and licenser InterDigital Inc. (IDCC) after missing out on Nortel. InterDigital shares plunged 16% to $63.62.
Most of the Motorola's revenue comes from smartphones, and the company has been working to diversify its customer base to defend against the potential loss of Deutsche Telekom AG's (DTE.XE) T-Mobile USA, a key customer.
Activist investor Carl Icahn, who is the company's largest shareholder, had been pushing for Motorola to sell its patents, a move he has argued could raise billions of dollars. Some analysts had said the deal could hobble Motorola, which relies on intellectual property to compete.
Icahn said in a statement Monday, "this is a great outcome for all shareholders of Motorola Mobility, especially in light of today's markets."
Motorola was founded in 1928 and in 1983 unveiled the world's first commercial portable cell phone, according to its website. The company split with its sister Motorola Solutions Inc. (MSI), which is focused on business and networking operations, at the beginning of the year. The separation made Motorola Mobility nimbler and more focused on its core operations, but it faces a highly competitive smartphone market.
Last month, Motorola reported a 28% rise in second-quarter revenue, thanks to strong tablet sales, but the device maker provided weak guidance for the current quarter because of delays in launching speedier 4G devices.
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