Google To Buy Motorola Mobility For $12.5 Billion: Big Step In Apple Battle

Google (NSDQ: GOOG) is making a huge investment in devices and is buying *Motorola* Mobility for $12.5 billion in an all-cash deal.

Motorola Mobility is the devices and services division of the Schaumberg, Illinois-based company, which was spun off from networking and infrastructure division Motorola Solutions earlier this year.

In a press release, Google notes that its offer, of $40 per share in cash, is 63 percent above the closing price of Motorola Mobility last Friday. Both boards have already approved the transaction.

This is a huge deal for both Google and Motorola (NYSE: MMI). It represents Google’s first big foray into physical devices, putting it more directly in competition with Apple (NSDQ: AAPL) by covering both the device and services layer in mobile. Motorola has been a dedicated partner of Google’s, making several handsets and a tablet that use the search giant’s Android mobile OS.

Google says that it intends to keep Android open to other device makers, while Motorola will of course remain a licensee as well.

From the release sent out by the companies, it looks like the acquisition is not only about mobile services; it will also focus on Motorola’s convergence and home business, which includes services like IPTV for carriers. Sanjay Jha, CEO of Motorola Mobility, from that release:

“This transaction offers significant value for Motorola Mobility’s stockholders and provides compelling new opportunities for our employees, customers, and partners around the world. We have shared a productive partnership with Google to advance the Android platform, and now through this combination we will be able to do even more to innovate and deliver outstanding mobility solutions across our mobile devices and home businesses.”

The straddling of mobile and fixed businesses may have been one reason why Google honed in on Motorola instead of one of its competitors. It wasn’t, in any case, because Motorola is the leading Android maker. According to Gartner‘s most recent mobile handset rankings, released last week, Motorola sold 10,221.4 million units last quarter, giving it a 2.4 percent share of the mobile market. While that was an increase on the 9,109.4 million devices sold by Motorola in the same period last year, its market share was actually down by 0.1 percent from 2.5 a year ago. Overall it ranks at number eight in Gartner’s list.

The acquisition will mean that Google is now getting thrown straight into the legal hot water where Apple and others are concerned: the Cupertino company is suing Motorola both in the U.S. as well as in Europe over patent and design infringements concerning its Android devices. Up to now, Apple has not directed any of its legal efforts against Google directly; just against the many companies that use its Android OS in its devices.

It also leaves a big invitation open to Microsoft (NSDQ: MSFT), which now remains the only big mobile operating system maker that does not own its own hardware business. There have been rumors for a long time now that Microsoft would buy Nokia (NYSE: NOK) — the two are already partnering very closely to develop a new generation of smartphones for Nokia — now that could have moved one step closer to a reality.

And it also throws open a big question of how dedicated Google’s many other Android partners will remain to the platform, now that Google has embraced one of their arch competitors. Other OEMs that use Android include Samsung, HTC, LG (SEO: 066570), ZTE, Huawei and *Sony*Ericsson.

If Google has ever had any frustration with how its OS has been implemented by third parties, this acquisition could give the company a chance to show the rest “how it should be done.” That will mean one less excuse when things go wrong, too.

Motorola and Google will be holding a conference call later today; we will be listening in and updating with more details. Read more detail from the conference call here.