S&P Gives Big Downgrade on Google-Moto Deal (GOOG, MMI)

August 16, 2011 by Jon C. Ogg

Google Inc. (NASDAQ: GOOG) has seen a mixed fanfare on its $12.5 billion acquisition of Motorola Mobility Holdings, Inc. (NYSE: MMI).  We have a very mixed bag reception, but the big standout is the SELL rating from S&P Equity Research.

Standard & Poor’s has its S&P Equity Research and the rating group has lowered the stock all the way to SELL from a prior BUY rating.  S&P cut the price target all the way down to $500 from a prior target of $700 as well.  The deal poses a risk according to the report in part because it is not certain that the Motorola patent portfolio (well over 20,000 patents) will be enough to protect the company from suits over intellectual property.

Another concern is that the deal will hurt Google’s margins, as well as its growth rates and even its balance sheet.

What makes the call so odd is that this differs a bit from yesterday’s call from the Standard & Poor’s credit analysis.  S&P said yesterday that Google’s ratings would be unaffected by its announced deal to acquire Motorola Mobility.  The ratings and outlook of AA-/Stable/A-1+ remain unchanged. S&P noted that financing for the deal was not indicated but the firm believes that Google has no need to raise cash to fund the purchase as had more than $39 billion in cash on hand and strong free cash flow.

Google shares closed at $563.77 on Friday before the deal was announced.  Shares closed down at $557.23 on Monday and down at $539.00 on Tuesday.  That is a total drop so far of only about 4.4% in the last two sessions.  If there was real problems with the deal we would have expected the dilution in share price to have been about twice the 6% or 7% of the implied market cap before it was announced.

So here is where the in-fighting starts.  S&P says Sell on the equity side yet takes no action on the balance sheet side.

JON C. OGG

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