Motorola Employees Need to Start Googling Jobs
Rita is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Motorola (NYSE: MMI) employees need to start looking for jobs as the online search giant Google (NASDAQ: GOOG) decides to make this recently acquired phone maker lean and fit for survival and growth. Google has announced it plans to bring down the employee base at Motorola by as much as 4,000, coming to 20% of the entire work force. Wall Street was very quick to react to the news and as a result the stock prices moved up by 3%. In a world of cut-throat competition how does a company that is making losses continuously survive? Well, Google is here to teach us that. Let’s check that out.
The reduction strategy
Motorola has been struggling for a very long time and now as a measure to reduce cost Google will cut those jobs and do away with around 30 of its 90 worldwide offices. This decision to lay off and close units has not been an easy one for the giant and neither has it been cheap. The move is going to cost Google $275 million thanks to the severance related payments, outplacement services and other expenses that will be reflected in the coming third quarter’s results. The decision is a part of a long-term goal that Google has prepared for Motorola and the giant expects to improve the subsidiary’s situation gradually and reach a stage where it can enjoy sustainable profitability. The third quarter will be influenced by layoffs, but several other costs will reduce and all this should help Google report lower losses from Motorola. While about a third of the 4,000 jobs loss will come from US, management is looking at shrinking their operations mainly in Asia and with more focus on India.
However, cost-cutting measures are definitely not new to companies whose bottom line has been in the red continuously. Google via Motorola joined the long list of companies taking this path. A few months back Nokia (NYSE: NOK) announced its plans to cut 10,000 jobs worldwide as well as close down few of its non-performing operational units and already has started work along this path.
The need behind the strategy
Last year Google acquired Motorola for $12.5 billion and it surely doesn’t want to see its investment go to waste. One of Google’s intentions behind this move was to protect itself from the ongoing trend of lawsuits over patent disputes. Motorola’s 1,700 patents will help Google defend its Android OS against attacks from rival Apple (NASDAQ: AAPL) and also many others. Secondly, the online search giant intends to enter the hardware space as evident from the Nexus Q. Though Nexus Q failed as the company postponed shipments indefinitely in order to improve the device, this does not erode Google’s plan to enter the hardware space. Through Motorola, Google wants to manufacture its own smartphones and tablets.
Google can’t allow Motorola to continue as a loss making unit. Motorola’s $233 million operating loss on $1.25 billion revenue had pulled down Google’s EPS for the second quarter of fiscal 2012 from a possible $10.12 to $8.42. The Moto-RAZR maker functions in the smartphone space dominated by Samsung and Apple with a combined 90% market share and very little is left for other players. Though Google is the market leader in terms of smartphone OS, its step child Samsung is ruling the handsets space. The Android maker wants to make its own child Motorola stronger, leaner, meaner and more agile to battle the South Korean phone maker.
The reaction of the strategy
As Google plans to reinvent Moto, the company will do away with the age old non-Android handsets of the phone maker and also likely to sell out the set-top business. With these expectations, several analysts have been raising their price targets for the stock and are increasing their bottom line and EPS expectations.
However, there is one tiny drawback of the downsizing move. Out of the 4,000 jobs that will be lost, one-third will be from the US and out of this, around 700 jobs cuts will be in Illinois. At present Motorola enjoys an agreement to get tax breaks worth $100 million over a span of 10 years and to date it has already received tax credits of $18.6 million. The primary clause in the agreement is that Motorola needs to maintain a minimum employee base of 2,500 at the Illinois center. But with this 700 employee lay-off, the employee count will fall to 2,256 and as a result the tax credit will not be available until the employee base again reached the minimum requirement. Apart from this, Motorola will also not be receiving the $3.25 million for training and other purposes that it was supposed to enjoy previously.
Despite these Google is going ahead with its plan and this also tells a lot about the plans Google has in store for Moto. Definitely Google is no child and knows very well what it is doing. There must be bigger gains in store which the company is certain of and that’s why this $100 million tax credit agreement holds very less importance. Google wants to fix Motorola first and then when the global reorganization is over and Moto starts functioning properly, Google will again hire and avail the benefits of the arrangement.
Concluding thoughts
Google’s move to fix Motorola is looking fine to me and is an obvious necessity. With gradually reducing cost and better R&D resulting in better products pushing up the top line, Motorola can sync itself with Google’s growth goals and positively contribute towards the success of its parent. Though the process of laying off is never an easy one, the giant is doing all in its means to make it as smooth as possible. The top priority of the Android maker is to restore Motorola to health and probably with a big name such as Google backing up Motorola, better days are yet to come for the troubled smartphone maker. Till then we should keep a close watch on the stock and see how well these plans work out.
analyse360degree has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple and Google. Motley Fool newsletter services recommend Apple, Google, and Nokia. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.
