S&P downgrades Google stock following Motorola deal

The S&P is not convinced that Motorola's patent portfolio will do much to protect Android

Google shocked the tech world yesterday when it announced in the wee hours of the morn that it had agreed to acquire Motorola for $12.5 billion in cash.  But while many were shocked, not everyone was happy about the deal.  S&P has changed its rating on the search giant from “buy” to “sell” and cut Google’s price target from $700 to $500.  And…as you might imagine, shareholders are, indeed, selling.

Google stock dropped 3.27% on Tuesday, closing at $539—a full $18 lower than yesterday’s closing price of $557.  Stock is down more than 4% from Friday’s close at $563.  Has the Motorola deal scared off shareholders?  It would seem that some investors aren’t convinced that Motorola will really do that much to help Google in its quest to ward off attacks from competitors.

In a research note, S&P analyst Scott Kessler explained the rationale behind the downgrade:

“After further consideration of GOOG’s plans announced yesterday to purchase Motorola Mobility, we see greater risk to the company and stock. We expect the transaction to be consummated next year, but later than early 2012, which GOOG indicated. Moreover, despite MMI’s extensive and valuable patent portfolio, we are not sure it will protect Android from IP issues. We also believe the purchase of MMI would negatively impact GOOG’s growth, margins and balance sheet. Based on revised DCF analysis, we are cutting our 12-month target price.”

Ouch. 

Much of the discussion in yesterday’s conference call centered on Motorola’s patents and how they will help Google ward off the anti-competitive efforts of Microsoft, Apple, and Oracle.  One theme that definitely dominated the call: Yes, Google believes that Motorola’s patents will help it fight off its competitors, but no, Google is not ready to talk strategy.  Question after question came through as to how Google planned to use the Motorola patent portfolio to protect Android, but David Drummond  explained vaguely: “We look to protect the android ecosystem, and some companies are trying to attack it…we’re not prepared to talk about strategies at the moment, but we think that acquiring Motorola is a good thing.”

The Motorola patent portfolio contains 17,000 patents and another 7,000 that are pending.  By comparison, Apple and Microsoft recently teamed up to buy Nortel’s patent portfolio, which contains 6,000 patents.