Google agrees to sell Motorola to Lenovo for $2.9 billion

• Lenovo gets Motorola brand%2C including Moto X smartphone
• Google keeps most Motorola patents%2C provides Lenovo a license for some patents
• Google agreed to pay %2412.5B in August 2011 for Motorola
• Google will keep selling its own line of Nexus smartphones

SAN FRANCISCO — Google said Wednesday it agreed to sell its Motorola business for almost $3 billion to China's Lenovo Group, a major strategy shift that gets the Internet search giant out of the business of manufacturing smartphones.

Google shares rose 2.6% to $1,136 in after-hours trading on optimism that the company is shedding a business that has dragged on its earnings. Motorola lost more than $1 billion in the year ended Sept. 30 as revenue slumped 34%.

"This was an under-performing asset and was always a stretch for them," said Mark Mahaney, an analyst at RBC Capital Markets. "They probably never should have gone into the handset business."

Lenovo is paying about $2.91 billion for Motorola: $660 million in cash, $750 million worth of Lenovo stock and $1.5 billion in the form of a three-year promissory note. Lenovo gets the Motorola brand and current and future products, such as the Moto X smartphone. It also gets more than 2,000 patents and the Motorola trademark portfolio.

The sale price is a lot lower than the $12.5 billion that Google agreed to pay for Motorola in late 2011, in its largest acquisition ever. However, Google is keeping most of Motorola's patents and is providing Lenovo a license for this portfolio and other intellectual property.

Google was attracted by Motorola's huge patent portfolio, but it also let Motorola develop new smartphones, such as the Moto X, which went on sale last year.

Sales of the new Motorola phones have not been strong, though, and there are signs of a broader slowdown in the smartphone market, where intense competition is making it more difficult to make a profit from just manufacturing the hardware.

"Google got what they wanted and needed from Motorola — they got patents, engineering talent and mobile market insight," said Jack Gold, principal analyst at J. Gold Associates.

The Lenovo deal "gets them out of a business they don't have a chance of making any real money in, and gets them the ability to concentrate on real opportunities without the diversion of having to run a device manufacturing company," he added.

When Google makes its own smartphones, it creates potential conflict with smartphone makers such as Samsung Electronics and HTC, which also use Google's Android operating system to run their devices, Gold added. Selling Motorola eases this tension, he says.

"I think that was the plan all along — Google would milk Motorola for a couple of years, then sell it off," Gold said.

Google CEO Larry Page signaled that the company would be stepping back from the smartphone manufacturing business when the Lenovo deal closes.

"The smartphone market is super-competitive, and to thrive, it helps to be all-in when it comes to making mobile devices," he wrote in a company blog post Wednesday.

Motorola will do better as part of Lenovo, which is already the largest PC maker in the world, he added.

The sale will let Google focus on the continued development of the Android operating system, "for the benefit of smartphone users everywhere," Page also said.

The deal does not signal a larger shift in Google's hardware efforts, which include Glass smart eye-wear and the newly acquired Nest smart thermostat and smoke detector business, Page said.

"The dynamics and maturity of the wearable and home markets, for example, are very different from that of the mobile industry," Page added.

Google will keep selling its own Nexus smartphones and tablets, but these are manufactured by other companies, most recently LG and Asus.

Once a leading smartphone maker, Motorola's share of the U.S. market dropped to 5% in the fourth quarter, way behind Apple and Samsung, according to Consumer Intelligence Research Partners.

"While Android continues to dominate operating systems, Motorola did not achieve meaningful share," said Mike Levin of CIRP.

Google has already sold some of Motorola's other assets, such as its set-top box business. With the proceeds from those deals and the Lenovo sale, RBC's Mahaney reckons Google will end up paying several billion dollars for patent protection for Android.

In 2011, Apple's approach of integrated hardware and software was considered the best. Google might have also bought Motorola to give that approach a try. When it did not work out, the company sold.

"At the time, Apple was perceived to be doing everything correctly, but that has subsided somewhat," Mahaney said. "Google spent time realizing the challenges of running a handset manufacturing business and decided now is a good time to get out."

Page said Google acquired Motorola to help "supercharge" the Android ecosystem by creating a stronger patent portfolio.

"Motorola's patents have helped create a level playing field, which is good news for all Android's users and partners," he added.