This is a good example of significant cost synergies being squeezed from a major takeover. Google, which acquired Motorola Mobility (a manufacturer of mobile phones) for $12.5bn, has decided to make 20% of Motorola’s workforce redundant. That’s around 4,000 employees who will lose their jobs.
The strategic rationale for the rationalisation of the Motorola business appears to be driven by two decisions:
To withdraw Motorola from manufacturing “low-end mobile phones” (i.e. not smartphones)
To pull Motorola out of geographic markets where it is making losses
The rationalisation strategy at Motorola looks like it might only be at the beginning of a process. A broader turnaround and repositioning of the acquisition is in play - so we can probably expect further announcements.
According to the Telegraph:
“The drastic cuts are the first step in a turnaround of Motorola that will be closely watched by Google’s investors, many of whom were sceptical about the price tag on Motorola.
Google wanted to get its hands on the phone company’s 17,000 patents and 7,500 pending patents, which would provide it with a bigger slice of the tech world’s intellectual property and give it more legal weight when going into battle against competitors such as Apple.”
Google’s takeover of Motorola Mobility raised many doubts amongst investment analysts, who questioned both the high price being paid and also the strategic rationale of vertical integration (Google - a software business - buying Motorola, a phone maker).
Google’s first quarterly report with Motorola Mobility included in results showed that Motorola Mobility contributed $1.25bn in revenue for Q2 in 2012, but had losses of $233m. It is vital for Google that it stems those losses to prevent the Motorola takeover destroying shareholder value.