DealBook: What’s Behind the Hefty Motorola Breakup Fee

Ryan Anson/Agence France-Presse — Getty ImagesGoogle’s headquarters in Mountain View, Calif.

Google proved itself willing to pay up for Motorola Mobility, agreeing to buy the cellphone maker for $12.5 billion, a 63.5 percent premium.

But the search engine giant was also willing to offer a significant reverse termination fee to guarantee that it was committed to the deal.

Google’s deal contained a $2.5 billion reverse breakup fee, according to people with direct knowledge of the matter who spoke on condition of anonymity. That’s roughly 20 percent of the purchase price. Subtract Motorola’s $3 billion in cash on hand from the purchase price, and the fee constitutes an eye-popping 26 percent of Google’s total consideration.

That is well above normal. Reverse termination fees usually run 4 percent to 10 percent of any given transaction. (The fee terms will be disclosed when the companies file the merger agreement with the Securities and Exchange Commission.)

The most comparable payout provision of late is in ATT’s $39 billion takeover of T-Mobile USA, where the telecommunications giant agreed to a $3 billion breakup fee. ATT also included several roaming and spectrum agreements worth up to an additional $3 billion. All told, that consideration is only 15.3 percent of the entire deal.

In ATT’s case, the hefty fee is meant to show the company’s commitment to sticking with the deal through what has been a very rough antitrust approval process, with inquiries not only from federal regulators, but their state counterparts as well.

People with direct knowledge of the Google-Motorola talks say that neither side is concerned about antitrust risk in this deal. Because it represents vertical integration instead of horizontal consolidation — meaning that it isn’t putting together two direct competitors, as in the T-Mobile takeover — the two companies think the merger should pass regulatory muster.

But not all observers are as sanguine about that assumption. Florian Mueller, an intellectual property analyst and blogger, surmises that Google is still wary of any antitrust issues, given its previous deal hurdles.

Mr. Mueller also points out that Motorola is embroiled in patent litigation with two powerful foes, Apple and Microsoft. The former has sued other Android device makers, including HTC and Samsung; the latter has struck a settlement with HTC and is fighting Samsung in court.

Motorola appeared to hold weaker ground in its battles with Apple and Microsoft, according to the analysis by Mr. Mueller, and faced the possibility of costly setbacks or settlements.

At the same time, as DealBook previously reported, Motorola was in talks with other parties about potential deals for its patent portfolio. While the company didn’t run a formal auction process, it wasn’t shy about pitting would-be suitors against each other to elicit the most favorable deals, according to a person with direct knowledge of the talks.

Given that Google openly spoke about its need for a bigger patent portfolio, it’s possible that Motorola — holder of 17,000 issued patents and 7,500 patents under review — was in a healthy position to demand the big fee.

Article source: http://feeds.nytimes.com/click.phdo?i=a5b484a66eca6f9aea53405cbc8aa53e