Market valuations and Google's $12.5bn bid for Motorola.

I have to say that given the recent market correction Google's bid for Motorola is good news. If Google is willing to buy out Motorola's mobility division with an all cash bid of $40 per share which itself is a 63% premium to Friday's closing price, it does say something significant about valuations now and in the future.
No holding back on that one then was there. No arguing about current valuations either. Google has obviously stacked up the sums internally and made assumptions on both the stand alone value of Motorola and the broader value to Google's existing and proposed products.

Anyway, the key message for me is that, for Google, the expectation of the future is intact and companies such as Google can still see value despite it not being reflected in todays share price. The value of the patents might make this a value play, or just give more freedom to the design of new products, or just save on legal fees. 
When making a business decision like this it also helps to have $13.6bn in the bank and $29bn of income (before the addition of Motorola).

Whether or not this damages the relationship with other mobile manufacturers currently using Android remains to be seen.

Elsewhere - :


"The recent sell-off is creating an opportunity for brave investors: recession-level P-Es for some top U.S. companies. Nearly 100 of the 460 companies in the Standard & Poor's 500 with profit forecasts for 2011 are selling at single-digit price-earnings ratios based on those earnings expectations, including giants such as Ford, Hewlett-Packard and Chevron.

That creates a chance for investors to get recession-like prices even if the broad market isn't yet so beaten-down. It "underscores value in the market," says Robert Maltbie of Singular Research. "The market is undervalued on historical, relative and absolute basis," USA Today reports." (www.digitallook.com: US newspaper round-up: Bargain stocks, Abercrombie, Germany.)

There are plenty of examples of businesses over-valuing and overpaying and current valuations being so low doesn't mean that the market is wrong with its valuation of the current risks.
But, long term, if your view is that the world isn't going to end then this is just another minor correction in a long term story. And, as long as those forecasts remain intact the value will come out in the end.

Markets are never going to be a one way journey or even as simple as 2 steps forward 1 step back so, as ever, the goal is to recognise value and pay the right price for it.

Related articles:

- www.telegraph.co.uk: Google buys Motorola Mobility in $12.5bn deal
- www.digitallook.com: US newspaper round-up: Bargain stocks, Abercrombie, Germany.