Motorola filed a copy of the acquisition agreement between it and Google on Wednesday that spells out the exact terms when this fee is required to be paid. There are two circumstances:
1. The agreement is terminated because a government authority (e.g., a federal court or European Union antitrust authorities) issues a final, non-appealable order blocking the transaction on antitrust grounds.
2. If by Feb. 15, 2013, the transaction has not closed because it is being blocked by the authorities or has not cleared antitrust review, either party can terminate the agreement and transaction. The fee is then payable if two more conditions are met:
a) The transaction could otherwise close but for the failure to obtain antitrust clearance or the government blocking the deal.
b) Google willfully failed to use its reasonable best efforts to complete the deal or otherwise willfully breached the requirements in the agreement to obtain antitrust approval.
Basically, these provisions can be boiled down to an agreement that if the transaction is blocked on antitrust grounds, then Google is on the hook for $2.5 billion. But as long as Google complies with the agreement, it will have to fight such a government action in court, and a final disposition of the action has to occur by Feb. 15, 2013.
People close to Google have said they do not believe there are antitrust problems. So why is the fee so big?
The fee’s driver is that Google has become what Microsoft was a few years ago, a natural target for European and American antitrust regulators. For the foreseeable future, any significant transaction Google engages in will really be all about antitrust in terms of getting it done.
Absent this factor, the antitrust risk on this deal seems low. There is not substantial overlap between the company’s businesses. Google, the Internet search engine giant, also produces Android phone software, while Motorola Mobility manufactures cellphones and other wireless devices. Since there is virtually no horizontal overlap, the deal is known as a case of vertical integration. This is where two companies combine whose products are usually made separately but can be used in each others’. An example might be if General Motors bought a steel maker.
In the case of vertical integration, the antitrust authorities would have to show that competition would be reduced to challenge the transaction. This is a hard thing to do in the case of vertical integration because the impact on competition is much harder to measure.
This big fee, however, may not be a signal that there is an antitrust risk that the deal will be blocked, but a statement to the market of the opposite: that there is no such risk. By agreeing (or perhaps even proposing) such a large fee, Google is saying this is not a problem. And antitrust authorities are now put on notice that if they decide to give Google a hard time, the company is not only going to fight this but will be willing to pay for the fight to the tune of $2.5 billion.
This fee may therefore be a statement by Google that the antitrust authorities should tread carefully in examining and challenging this deal.
There is precedent for this. When Microsoft agreed to buy aQuantive in 2007 for $6 billion, it agreed, likely for similar reasons, to a $500 million reverse termination fee, or just over 8 percent of the deal value.
Typically, merger agreements have provisions that also spell out the procedures and steps the parties will take to obtain antitrust clearance. If you look at these provisions in the Google-Motorola Mobility acquisition agreement, they support the theory that this is all about Google making a statement to the antitrust authorities.
The provisions provide Google complete control over the antitrust process. In addition, the agreement does not obtain any species of a “hell or high water” provision. This provision, commonly seen in deals with antitrust risk, requires the buyer to take steps like asset divestitures or licensing of technology to satisfy antitrust regulators and obtain antitrust clearance. But there is no such provision in the Google-Motorola Mobility transaction agreement. This is a boon for Google, because regulators will look at such a provision as an easy way to force concessions. Google does not want to provide antitrust regulators any low-hanging fruit.
To some extent, the high reverse termination fee functions as a form of hell-or-high-water provision, though it is different in an important way. Without this provision, Google can arguably refuse to take any steps to satisfy regulators and simply pay the fee. If there were a hell-or-high-water provision, Google would first have to offer up concessions.
Again, making the fee higher benefits Google. If it were smaller, say only a couple of hundred million dollars, regulators might strong-arm the company into simple concessions, thinking this was chump change to Google. By setting it higher, Google has sent a warning: If you come after us, you better be serious and we are not going to give.
Here, the actual terms specifying when Google has to pay the fee also benefit it. Because so much is at stake, Google will fight any antitrust action and is unlikely to breach the agreement. This would only leave a final order blocking the merger as the way such a fee is payable, meaning a long fight for regulators.
Of course, I am sure Motorola Mobility asked for a high fee and was happy to take it. But the acquisition dynamics play to both parties agreeing to this fee. This $2.5 billion fee is therefore different than the $3 billion fee that AT&T agreed to pay T-Mobile if that deal does not obtain regulatory clearance. In the case of the AT&T-T-Mobile deal, the fee is all about compensating T-Mobile if the deal collapses and assuring it on the risks involved, as well as incentivizing AT&T to do what is needed to obtain this clearance in terms of regulatory concessions.
And for those wondering, the Microsoft-aQuantive deal closed without any significant antitrust scrutiny.
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