Google's War Against Apple

August 17, 2011

Fun fact: You think this was a pricy acquisition? Not even close… The most expensive acquisition I could identify was Vodafone Airtouch acquiring Mannesmann in 2000 for $202.8 billion followed by AOL acquiring Time Warner for $181.6 billion in 2001.

Google's War Against Apple

The 63% premium Google is offering to acquire Motorola Mobility has caused quite a stir; the pending merger of "Motorolans with Googlers" [Googorlas??] has opened conversations about the value of IP and patents, the escalating number of lawsuits due to patent infringement, as well as the question about the future of the open Android operating platform. It is hard to filter out what analysts/investors really think about the deal by looking at share price activity during the day, given the instability in the financial markets right now, but here are the facts. At 3:30pm EST on 8/17/2011...                

Google (GOOG): -1.21%

Apple (APPL): -0.14%

Microsoft (MSFT): -0.87%

$12.8 billion is a hefty price tag and a 63% premium is steep. Google is gaining access to 17,000 patents. There were discussions in the Financial Times and New York Times about the new valuation of patents and a new focus on IP. But is that really true? Maybe in this particular space, analysts have not paid much attention to patent portfolios, and only now that litigation is publicly escalating and M&A activity between these tech giants is rising, they are beginning to take a closer look. The actual competitors in this space have always had a strong eye on IP. Certainly in other industries, patents have been essential and key to M&A valuations and acquisition premiums. Look at the pharmaceutical industry. Talk about the need to patent your formulations to guarantee future revenue streams.

Of course, ownership of patents during this time seems to be more relevant than ever considering that seemingly new litigation is filed every day and everyone is going after each other, like children on a playground…fighting for world dominance (see Apple: Litigation as a Business Strategy). In general, patent infringement suits are warranted, but the recent escalation is not only consuming tremendous financial resources, but also stifling innovation due to concern over legal action among smaller entrepreneurial businesses.

Another point that has been heavily debated back and forth since the official announcement of Google's acquisition, is the future of the open operating platform, Android. In its official investor relations' announcement, Google stated that it is firmly committed to its current Android partners and the "vibrant open source community". Some analysts have speculated that going forward, Google will give Motorola Mobility handsets some kind of exclusivity. Why risk having Google's current partners switch to a Microsoft-based operating system for their smartphones? Nokia may be a bit too optimistic assuming that "the acquisition will play into the hands of Microsoft platform."  Google will have to be careful in how aggressively it pursues direct competition with its current partners. There should be plenty of room for additional customer segmentation.

Initially, I believe there is truth in one assessment, which is that Google is indeed defending Android and its partners (FT: Lex Column). The acquisition was pursued as a means to "protect profitability of the handset manufacturers that deploy Android." In reality, this may be an opportunity for Google to build a stronger core (no pun intended) against Apple, based on existing and acquired patents, but also an opportunity for further innovation.  Together with all Android-partners, which may become loyal soldiers/allies if executed correctly, they can build one united front against Apple.

So yes, I do believe this is war against Apple…

[P.S. My husband says I am a cynic and should write about more positive things. There is always next time…]

Image: http://wpuploads.appadvice.com/wp-content/uploads/2011/08/google-android-motorola.jpeg

Kraft: Mergers & Acquisitions… America's Snakes

August 5, 2011

Kraft: Mergers & Acquisitions… America's Snakes

The cycles of mergers and acquisitions are truly amazing. When existing business units are predicted to experience slowing growth but cash is on hand to explore synergistic areas or opportunities exist to reduce cost, diversification is pursued. The painful cycle of integrating two or more businesses/organizations is endured with the promise of "building shareholder value". Yet, markets are rarely stagnant, dynamics can change rapidly, impacted by the global economy, R&D development progress, and competitor moves. If diversification seemed like an appropriate business strategy yesterday, a divestiture may appear more suitable tomorrow.

So seemingly the story of Kraft, which over the last couple of days announced its decision to separate the fast growing global snacks business (roughly $32 billion in annual sales) from its slower-growth North America grocery business (roughly $16 billion in annual sales). "Investments fashions come and go", so Helen Thomas in today's Financial Times. Over the last ten years, Kraft has morphed its portfolio starting with the $15 billion acquisition of Nabisco in 2000. Philip Morris/Altria sold its stake in Kraft in 2007, the same year in which Kraft acquired LU biscuit business from Danone for approximately $7 billion. The diversification continued with the hostile acquisition of Cadbury for $19 billion. As one of three articles on the topic in today's Financial Times points out, "The U.S. group had angered many after the Cadbury takeover, when it closed a factory in Bristol, […], with the loss of hundreds of jobs, in spite of having promised to keep the site open." [Business is business, right? No Bodhisattva principles applied here. Maybe a topic for another blog.]

Irene Rosenfeld, who remains one of the few leading ladies in Corporate America, and according to Forbes is one of the most powerful woman in the country, has served as a strong leader for Kraft since 2006. [Interesting feature in the Chicago Tribune on her career today.]

 Over the last ten years, Kraft had some turnover in its corporate leadership, maybe a bit more so than expected at that post. [At least three that I can come up with.] Just one more turn in the road. I like to think of organizations as snakes that slither around obstacles. They swallow large foods that sometimes take a long time to digest (merger/integration). They spit out indigestible leftovers (consolidation/layoffs) and after some growth, shed their skin to come out leaner and more energetic than ever before (divestitures/further consolidation).  And depending on what kind of snake it is… they sometimes bite! [Maybe in my next blog I will match companies with their appropriate "snake counterpart". Shareholders beware!!]

During my professional career, I have seen few acquisitions that have yielded actual ROIs. Bold moves that are mostly plagued by challenges and only under a next-generation of leadership may yield some benefits. Kraft is clearly looking for greater shareholder confidence and credit for its growth businesses. The timing is a bit unfortunate, given the weakness in the stock market. There really appeared to be no gains in share price to speak of yesterday. Good luck Kraft. Good luck Irene!


Image: http://www.reclusland.com/compass/wp-content/uploads/HLIC/92b5151aecb3d61181a104600fb1abc4.gif

"Apple, but really Nintendo… Let the Games begin!"

August 2, 2011

"Apple, but really Nintendo… Let the Games begin!"

A couple of days ago, an article appeared in the WSJ entitled "Nintendo: Apple's Latest Prey". It talks about how Nintendo has struggled with new product releases and game sales since the release of the Wii in 2006. The problem? Mainly the change in technology and its influence on the gaming industry. Specifically, the article draws reference to the growing popularity of gaming on Apple's iPhone and iPad, and other tablets and technologies. Pricing and accessibility are much more mainstream with the new technology platforms.

Image: Took some liberties here. Not an original. In case you can't tell.

I will openly admit that the tech revolution has passed me by to a great extent. I recall playing computer games on a Commodore 128/Commodore 64… haven't done much since. And the simplistic layout of this blog only gives validity to my point.

So, when Nintendo's stock price crashed after a presentation by Nintendo's president Satoru Iwata on the new Wii U, I can by no means provide an opinion on whether or not this reaction was justified. Since that day in June at the E3 Games Show in Los Angeles, Nintendo's U.S. stock (ADR) price has declined from roughly $28 per share (June 7, 2011) to roughly $19 per share today. The share price seemingly hit a peak on February 25^th with $38.29.

The WSJ reported significant declines in share price on the Osaka Securities Exchange last week following a downward adjustment in Nintendo's profit forecast by 80%. Ouch! Challenges that led to the adjustment:

·         Unit sales of only 710K of its 3DS devices in three months.

·         Drop in Wii sales by nearly 50%.

Nintendo is now looking at the Wii U as the main growth driver to turn around momentum. The product is slated for commercialization in 2012 and is based on a tablet controller. Quite frankly, with the integration of technical applications into mainstream consumer electronic devices, these products will probably remain for "hard core gamers" only. [That seems to be the correct term!] So, if the Wii U is for the hard core gamer, what is the Nintendo response to the mainstream, low cost, mobile consumer device games that are changing the industry? In my limited research, I could not actually find an Annual Report more recent than the 2008 version, which prevents me from commenting on how much Nintendo is investing in R&D and what its pipeline looks like. One article I found commented on investments of $204 million in the construction of a new R&D building in Kyoto, Japan, that is scheduled to begin in 2012. It does not look like the company intends to roll over.

For argument's sake, let's agree that there appears to be a gap in Nintendo's portfolio for the mainstream gamer/consumer as the space converts to mobile, integrated platforms. The threat for Nintendo's console business comes from Microsoft and Sony. So, was the title of today's article in the WSJ an exaggeration or a suggestion of what may come? Would Apple consider making a play for Nintendo? There has been a lot of talk about how much cash Apple has on hand as of late. Rumors about this particular acquisition opportunity seem to date back as far as 2006. If net losses continue and the stock price keeps falling, Apple may be able to purchase Nintendo for a bargain price.

Maybe this story is not about Nintendo after all… Let the games begin!