Google Inc will slash 20 percent of the workforce of Motorola Mobility in the Internet search giant's largest job cuts ever as it moves to make more smartphones and fewer simple mobiles.
The news sent Google's shares up as much as 2 percent but analysts said it was unclear if the cuts were enough to restore the fortunes of Motorola, whose last hit was the Razr flip-phone launched eight years ago.
"I think it's still going to be challenging to navigate the waters (of the handset business); how do keep your partners happy and how you push your own smartphone devices at the same time," Morningstar Inc analyst Rick Summer said.
"This is the obvious step. The things that are harder are how do you drive profitability, how do you carve out a niche for Google devices, how to end up delivering solid returns on capital."
Google bought the loss-making cellphone maker for $12.5 billion last year, aiming to use Motorola Mobility's patents to fend off legal attacks on its Android mobile platform and expand beyond its software business.
Motorola's mobile devices unit has lost money in 14 of the last 16 quarters. In the second quarter, Motorola reported an operating loss of $233 million on revenue of $1.25 billion.
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While many questions remained over whether Motorola's strategy, Morgan Stanley upgraded Google to "overweight" after the cuts.
"We believe that Google is planning to reduce Motorola Mobility's smartphone portfolio to a few reference Android devices, and perhaps a couple of tablet devices," analysts at the brokerage said.
Google had evaded questions about its plans for Motorola Mobility when it reported quarterly results last month, saying it had yet to complete its homework on the various businesses.
Recent media reports have suggested that Google is shopping Motorola Mobility's television set-top box business which is not the best fit with Google's high-profit-margin Internet business.
WHAT SIZE FITS?
Morningstar's Summer said he does not expect mass layoffs at Motorola, but said things might change as Google reviews all of the cellphone maker's units and tries to sell the TV unit.
Others were similarly unclear about the right size for Motorola, which will close nearly a third of its offices.
"They are still learning what makes it a leaner meaner machine. I think as we move into the new year, there maybe more right-sizing," said Susquehanna Financial Group analyst Herman Leung.
Google said in a regulatory filing it expects to take a severance-related charge of up to $275 million mostly in the third quarter, but with some possibly trailing through to the end of the year. It warned there could be some other significant charges yet to be calculated.
Google shares were trading up 2.2 percent at $656.30 in early afternoon trade on the Nasdaq. They touched a high of $655 earlier.
One-third of the jobs lost will be in the United States, but the company has not specified where or what facilities would be affected.
Earlier the New York Times reported Google's plan and said it was looking to shrink operations in Asia and India, by not just exiting unprofitable markets, but also stopping making low-end devices and focusing on a few cellphones instead of dozens.
Motorola Mobility, which has 94 offices throughout the world, will center research and development in Chicago, Sunnyvale, California and Beijing.
In addition to the planned cuts, Google has downsized Motorola Mobility's management, letting go 40 percent of its vice presidents, but has also hired new senior executives, the New York Times said.