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Google, the accidental hardware company?

The smoke has cleared on Google’s $12.5B purchase of Chicago-based Motorola and now that almost everyone has had a chance to speak, I think we’re starting to understand what went down.

Google purchased Motorola (MMI) for $12.5B, a 63% premium over its weekend closing price.  Motorola, however, has around $3B in cash and securities, which makes the real purchase a slightly more reasonable $9.5B for Google.  For instance, if Google wanted to slice and dice Motorola, they’d take the cash and patents and sell off the cable box and device divisions for a couple billion dollars each and come away with about what they would have paid for Nortel – and get double to triple the patents. On sheer numbers of patents alone, it seems like a good buy. Obviously some patents are worth more than others.

If the deal doesn’t go through, Google owes Motorola $2.5B for the trouble, so Google is dead serious about this play.

But back to what Motorola does: They have IP, they make smartphones, they make tablets and they make cable top boxes.  It seems like almost too good a setup for Andy Rubin’s Android to just want to sell off piecemeal.

But did Google want to pick up a hardware company?  I reported earlier this year that the Android Hardware division that Andy Rubin had started up with former Danger Co-founders had intentions to build physical devices, not just Operating Systems.

That scale is what attracted and the former Danger founders to get the band back together, with their goal being to build the hardware and features they want to see show up in new Android devices. It’s not enough for Google to just provide Android software to carrier — now they hope to influence what handset makers build, too.

I didn’t mention it at the time, but members of the hardware team told me that they would love to be producing Google hardware by the end of this year. At the time, some questioned whether HTC and Samsung should be worried about Google’s hardware ambitions. Those questions are a many times bigger concern now.

I spoke to Samsung reps the day of the acquisition announcement and beyond their “It’s good for Android patent protection!” press release, they told me that they wouldn’t be able to comment until they understood Google’s intentions with Motorola and the ramifications.  Samsung since then has reportedly started looking around for ways to improve its own Bada Mobile OS, which has seen some success.

Samsung Electronics Chairman Lee Kun-hee urged his company`s executives to strengthen Samsung`s smartphone operating system Bada in responding to Google`s takeover of Motorola Mobility. Lee convened a meeting of executives of the company’s finished goods divisions to respond to Google’s acquisition

Without knowledge of Google’s plans, it would be its fiduciary duty to shore up alternatives should its relationship with Android sour.  Handset makers are already up in arms about getting builds of Honeycomb later than their peers; Imagine how they’ll feel about competing with Google.  I imagine HTC, LG, Sony Ericsson and others are performing similar exercises.

According to the Wall St. Journal’s Amir Efrati, Google’s Hardware ambitions played a big part in the decision to pick up Motorola.

People close to the deal said one of Google’s motivations was its desire to design devices, not just the software that powers them, thus giving it the sort of influence that rival Apple enjoys with its iPhone and iPad. That would play into the strengths of Mr. Rubin, who for years built gadgets for start-ups, one of which was acquired by Microsoft Corp. in 1997 only to lose momentum.

Competition was also a big concern.  GigaOm Malik says the Motorola talks only got fired up five weeks ago, perhaps as a result of Microsoft becoming a contender for Motorola.

The high-level talks between Google and Motorola started about five weeks ago. Google CEO Larry Page and Motorola CEO Sanjay Jha were talking directly, and only a handful of executives were brought into discussions. Our sources suggest that Android co-founder Andy Rubin was brought into the talks only very recently.

Motorola’s activist investor Carl Icahn was bent on selling Yahoo to Microsoft last year, so this isn’t a surprise.  Icahn was talking about spinning off the IP from hardware company and CEO Sanjay Jha had mentioned that he’d be willing to talk to Microsoft for “Nokia money” just last week.

If Motorola’s IP fell into Microsoft’s hands, there would be no escaping the taxes that Microsoft wants to exact on Android devices.

The writing had been on the wall at Motorola for a long time too.  Jessi Hempel noted:

Earlier this year, Jha talked to Fortune leaving the door open to a major deal and casting doubt on the company’s ability to go it alone ultimately. “I expect consolidation to occur. Our customers are consolidating, our suppliers are consolidating,” he told Fortune’s Geoff Colvin. Tellingly, he added that he didn’t see Motorola hooking up with another handset manufacturer. “Consolidation across software and hardware manufacturers create [the most] shareholder value,” he said, nodding to Hewlett-Packard’s (HPQ) Palm acquisition and Microsoft’s deal with Nokia (NOK). (Apple and Research in Motion (RIMM) already control both their hardware and software components.)

Its clear that if Patents weren’t a consideration for Google, they’d probably wouldn’t have made this move.  But now that they’ve purchased a Phone/Tablet/Set Top Box manufacturer, they have to answer…

What does Google do with its hardware business?

Before this deal even closes, it should be noted that it isn’t officially a “done deal”.  Microsoft or Apple or even Sony or Samsung could outbid Google’s 60% premium on Motorola’s shares.  Although unlikely, these very companies were the same ones that purchased a much less valuable patent Nortel portfolio for just half of what this deal is worth.

Also, Google may be forced to spin off the hardware divisions in order to placate Samsung, HTC, LG, Sony and its other manufacturers.  Dell (DELL) strikes me as someone who may be interested in buying Motorola’s hardware business.  Dell has tried and mostly failed at producing phones and tablets but picking up Motorola handset business might make some sense.  The same could be said for Acer and Asustek.  Cisco, Intel and Qualcomm could all be buyers for the cablebox business as well.

If Google keeps the hardware operations, Motorola would operate independently of Google until Google could absorb the business into its Android Hardware division.  Andy Rubin could then turn Motorola into his robot-making machine that would somehow not upset all of the other Android licensees.  I imagine a very hard and fast set of ground rules are in order.

Google could also slip its GoogleTV software onto all of Motorola’s cable boxes as well – again, also not upsetting the establishment of Cable companies…somehow.

We’re just at the beginning of this saga and It will be extremely interesting to see what unfolds.

Google has to absorb 19,000 additional employees.  I imagine that over the next two years, as they set a direction for the new hardware business, they will turn over a significant portion

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