We’re hearing from industry sources that Google has agreed to pay Motorola Mobility $2.5 billion if Google’s deal to purchase the phone maker falls through.
That payment, called a reverse breakup fee, is paid to the target company when the buying company fails to close the deal.
And the reported $2.5 billion — 20 percent of the $12.5 billion Google is poised to pay for Motorola — is far higher than the typical reverse breakup fee, which usually comes in around 3 percent.
Bloomberg reports that, on a percentage basis, the fee is more than triple the $3 billion AT&T is offering as part of its $39 billion bid for Deutsche Telekom’s T-Mobile USA, the largest deal this year. Both AT&T and Google face increasing scrutiny as regulators examine whether their acquisitions are stifling competition in the telecommunications and Internet industries.
Spokespeople for both Google and Motorola declined to comment.
There are different schools of thought about why the reverse breakup fee is so high.
“A high reverse breakup fee shows the buyer’s confidence of getting the deal done,” Donna Hitscherich, a senior lecturer in finance at Columbia Business School, who is also a former banker and lawyer, said in the Bloomberg story. “People don’t do deals to get the breakup fee, they do them to get the deals done.”
That could indeed be the case, said Silicon Valley antitrust attorney Gary Reback. Or, he said, it could be that Google is “willing to roll the dice in a situation where the other side thinks it’s risky. Or, it could also mean the upside to (Google) is so high that they’re willing to put that much money behind the risk of failure.”
Reback represented a coalition of companies opposed to Microsoft during the Department of Justice’s antitrust lawsuit against Microsoft in the 1990s. More recently, he’s been pushing the government to launch similar antitrust investigations into Google. He also founded the Open Book Alliance, which includes Microsoft a member. The alliance says it fights for open and competitive mass book digitization and publishing.
Reback believes the high reverse breakup fee in the Google-Motorola deal “presumes the acquired company is worried that deal won’t close because of some antitrust issues.”
He believes that Google is purchasing Motorola Mobility not just to get a larger stake in the mobile-phone market. “Their cash cow is their search monopoly,” Reback said. “The reason they’re willing to give Android away for free, pay for patents, is because they want to keep people from getting a foothold that would erode their monopoly in core search. So they’re willing to put up a lot of money to keep it from being eroded.”