Motorola Mobility 3-month trading chart

Google is buying cellphone maker Motorola Mobility for $12.5 billion US in a blockbuster deal that will see the search engine giant acquire Motorola's vast array of patents and turn Google into a mobile-phone maker.

The deal is by far Google's biggest acquisition to date. It will pay $40 per share in cash, a huge 63 per cent premium to Motorola's closing price on Friday. The $12.5-billion price will consume almost a third of Google's cash hoard.

Google makes the popular Android operating system that powers about 150 million cellphones around the world. 

Motorola is one of dozens of manufacturers that makes cellphones that run on the Android platform, in direct competition with Research In Motion's BlackBerry, Apple's iPhone and Microsoft's Windows mobile operating system for smartphones.

"Motorola Mobility's total commitment to Android has created a natural fit for our two companies," Google CEO Larry Page said in a statement. "Together, we will create amazing user experiences that supercharge the entire Android ecosystem for the benefit of consumers, partners and developers."

There's no question that a driving force behind Google's purchase is Motorola's valuable cache of 17,000 patents on phone technology. It has more than 7,000 patent applications pending.

Google recently lost out in a bidding war with a consortium led by rivals Apple, RIM and Microsoft for 6,000 patents held by bankrupt Nortel Networks.

Google has charged that Apple, Microsoft, Oracle and others have gone on a patent-buying spree to try to force Google to pay them a rich licensing fee for every Android-equipped device sold. Google is facing a raft of lawsuits that allege that Google's Android system stole patent-protected technology from rival tech companies.

"Our acquisition of Motorola will increase competition by strengthening Google’s patent portfolio, which will enable us to better protect Android from anti-competitive threats from Microsoft, Apple and other companies," Page said in a Google blog post.

Nokia, RIM shares rise

Shares of rivals Research In Motion and Nokia jumped by about eight and 16 per cent, respectively, as traders speculated that takeover offers for those two companies, which both have rich patent portfolios, could also attract premium bids. 

National Bank Financial analyst Kris Thompson estimated that RIM's patents could now be worth $10 billion and said speculation on their value could lift RIM's share price in the short term.

"We believe Google’s acquisition of [Motorola Mobility] will set a floor-value for RIM’s shares around current levels," Thompson wrote in a research note.

The deal also marks a major turning point in Google's strategic plan. Until now, it has largely confined itself to software development. Now, it also becomes a major manufacturer of telecom hardware.

What the deal won't change, according to Google, is the company's commitment to Android as an open platform.

"Motorola will remain a licensee of Android and Android will remain open," said Page. "We will run Motorola as a separate business." 

Motorola Mobility was split off from the rest of Motorola in January. Motorola made the first commercial portable cellphone in 1983. 

Motorola Mobility's shares soared $13.63 to $38.10 US Monday on news of the takeover offer, which requires regulatory approval.

The biggest shareholder beneficiary of this deal is billionaire activist investor Carl Icahn, who owns more than 11 per cent of Motorola Mobility. He had long urged Motorola to sell off its valuable patents.

Some analysts said Google's expansion into the cellphone manufacturing world could complicate relations with some Android partners who will suspect that Motorola will get a better deal from its new parent.

"Google will move from the position of partner to that of competitor to Android handset manufacturers, potentially placing significant strain on the Android ecosystem," Ovum analyst Nick Dillon wrote in a Monday note. He thinks some cellphone and tablet makers will switch to other software platforms if they detect the slightest evidence of favouritism.

But Google CEO Page pledged to treat all Android partners fairly. "Many hardware partners have contributed to Android’s success and we look forward to continuing to work with all of them to deliver outstanding user experiences," he wrote.

With files from The Canadian Press and The Associated Press