Right From Google's Clutches

 | Aug 17, 2011 | 9:00 AM EDT
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There was an interesting article by Forbes' Eric Savitz on Tuesday night, covering a Macquarie USA report that speculated Microsoft (MSFT) might take a run at Motorola Mobility (MMI) and claim it from Google's (GOOG) grip.

How can this be?

Macquarie analyst Kevin Smithen points out that Motorola has $3.5 billion in cash and $1.7 billion in net operating loss carry forwards. Once you assume that Google is going to spin off the home business to private equity, you're probably looking at only a $5.3 billion price tag for the patents and handset business.

Why couldn't Microsoft also spin-off the handset business? Well, it has more than $50 billion in cash and the ability to draw down its debt facilities. As such, it's clear the company certainly could pay an even bigger number for Motorola if it wanted to do so.

Why would Microsoft do this? To knee-cap a bitter enemy -- that's why. The firm could go after Google's remaining handset makers, such as HTC and Samsung, with the patents that Motorola was about to wield against them. Microsoft could convince them -- Redmond-style -- that the Windows 7 phone operating system was actually much better than the latest Android iteration.

So how much would Microsoft have to pay? It wouldn't be much more, in all likelihood. Google is really now at the maximum of what its board can credibly approve. The $12.5 billion represents almost one-third of their cash on hand, although it's less when you back out the various components described above.

Motorola's stock could give a boost to any merger-arbitrage hedge funds playing for an increased bid. On the other hand, shares of Microsoft and Google might take a short-term hit if a bidding war breaks out.

This could get interesting.

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volatility is quite low here, and we could see some downsides here in the short term. ...



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