Google Is Selling Its Mobility Unit to Lenovo for About $3 Billion

Updated, 5:51 p.m. |
Google is selling its Motorola Mobility smartphone unit to Lenovo for about $2.91 billion, the companies announced on Wednesday.

Google’s Mobility unit includes handset technology that the search giant acquired when it bought Motorola Mobility for $12.5 billion in 2011.

That  acquisition was Google’s largest by far, and the biggest bet that Larry Page, its co-founder, has made since returning as chief executive in 2011. Google wanted Motorola’s patents and a cellphone maker to help its mobile business, and named Dennis Woodside, a former Google operations executive, as C.E.O.

Selling a major portion of the business would be a concession of defeat for Google and particularly for Mr. Page. Motorola has continued to bleed money, aggravating shareholders and stock analysts, and its new flagship phone, the Moto X, did not sell as well as expected.

However, this is the second divesture Google has made from the assets it acquired after buying Motorola Mobility, which was its largest ever acquisition. In 2012, just months after that deal, Google sold Motorola Home, which included its set-top boxes and cable modems, to Arris for $2.35 billion.

Google will also retain most of the patents it acquired as part of its original deal for Motorola, while granting Lenovo a license to use certain ones for its new handsets.

And in a blog post on Wednesday, Mr. Page characterized the initial Motorola deal as more about patents than hardware. “We acquired Motorola in 2012 to help supercharge the Android ecosystem by creating a stronger patent portfolio for Google and great smartphones for users,” he said.

For its part, Lenovo appears to be building a comprehensive business in simple computers. Once known primarily as a maker of personal computers, last week Lenovo paid $2.3 billion for a big part the computer server business of IBM. Already the world’s largest maker of PCs, the IBM purchase got Lenovo about 7.5 percent of the world market for low-margin servers based on off the shelf semiconductors.

Lenovo’s shopping spree may be driven by the necessity of moving into other markets. Last year, the world PC market contracted by 10 percent, according to IDC, to 314.5 million units.The reason is that people now buy smartphones and tablets instead of PCs. While IBM executives said they could not make a sufficient profit in commodity servers, Lenovo may hope to build an economy of scale buy buying chips for both PCs and servers in even greater bulk.

The same case could be made for phones, where Apple and Samsung have taken share from almost all other suppliers. According to NDP Group, in the U.S. market, the largest for high-end smartphones, Apple and Samsung have 68 percent of the market. The rest is divided up among a number of players, including Motorola Mobility, HTC, and Blackberry. While phones use different kinds of chips than PCs or servers, many parts and much of the contract manufacturing is done by the same companies. With more products, Lenovo can squeeze its suppliers harder.

“We will immediately have the opportunity to become a strong global player in the fast-growing mobile space,” Yang Yuanqing, Lenovo’s chief executive, said in a statement. “We are confident that we can bring together the best of both companies to deliver products customers will love and a strong, growing business.”

Away from the United States, Lenovo may be concerned about the rise of the smartphone market in its home country. China’s smartphone market includes, aside from the U.S. players, such local manufacturers as Huawei, ZTE, and Xiaomi. Products from all of these manufacturers are increasingly well-regarded, and have made inroads in several markets outside the U.S.

“It makes strategic sense for both google and Lenovo,” said Andrew Costello, a principal at IBB Consulting. “It will give Lenovo a strong brand in the mobile space outside of China that they don’t have today, and it gives them deep operator relationships with AT&T and Verizon. And for Google, they’re able to focus on the services side, which is what they’re best at, and retain the patent holdings.”

Google will receive $660 million in cash, $750 million worth of Lenovo shares and a three year promissory note worth $1.5 billion.

People close to Lenovo say they believe the deal will win approval from the Committee on Foreign Investment in the United States.

Credit Suisse is advising Lenovo, while Lazard is advising Google.