DealBook: Google’s Effort to Skirt Regulation May Invite More Scrutiny

Harry Campbell

Google’s motto is “don’t be evil.” But its recent acquisition of Waze, reportedly for $1 billion in cash, shows that just because you’re not evil, it doesn’t mean you can’t be aggressive in pushing the boundaries of the law.

The question now is whether the United States government pushes back and forces Google to give back its new toy.

Waze is yet another one of those blockbuster deals for a technology company with little or no revenue that makes you jealous. Five-year-old Waze has just 110 employees, so Google appears to be paying almost $10 million per employee. As for profits, Waze’s chief executive, Noam Bardin, has said, “This is Silicon Valley. We don’t talk about those things here.” Right.

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Google is paying top dollar for Waze because it is at the intersection of two hot fields: map search and social media. Users download Waze’s app to their phone and then supply information about locations, routes and traffic, making the maps more intelligent. And Waze has the usual phenomenal growth in users, with 50 million worldwide. This is a field where there is believed to be oodles of money to be made in related advertising.

From this vantage point, the deal has a number of “must” business justifications for Google. Google is the top dog, dominating the “turn-by-turn” market for mobile maps on smartphones, and Waze makes Google a bigger dog.

Perhaps more important, buying Waze keeps the technology out of the hands of Facebook, which had reportedly bid about $1 billion for the company, and Microsoft and Apple, which also reportedly bid $400 million for the company earlier this year.

A billion dollars not only cements Google’s lead in map search, it does so in a big way. Google has paid large sums to have cars drive around the world to give its maps information content. But Waze is doing the same thing on the cheap by having its own users do the work.

Both types of systems are difficult and hard to build, meaning new entrants are unlikely to come. Just witness the difficulties Apple faced with the controversy over the accuracy of its own map app. If Apple can’t do this easily with its built-in user base of some 400 million iPhone users, not many others can.

So one might think that there would be significant antitrust issues with the acquisition. Google, already the dominant player, is buying what looks like a rising competitor, and it is doing so in a way that deprives other big players an easier way to compete.

It’s here where Google is pushing as hard as it can on the law.

Normally, to acquire a company in the United States, a buyer is required to supply the Justice Department or the Federal Trade Commission with what is known as a Hart-Scott-Rodino filing. This notifies the agencies of the transaction so either can review it for compliance with the antitrust laws.

The filing also prompts a waiting period during which the government can delay the acquisition to begin an in-depth investigation to determine if there is an antitrust problem. This is one reason that public takeovers are completed months after they are announced: the companies involved are waiting to clear antitrust review in the United States or another country.

This is the normal process. Yet Google’s only announcement of the deal appears to say that the companies signed and closed the deal that day, leaving Google the proud owner of Waze.

According to a person close to Google, the company skipped the Hart-Scott-Rodino filing by relying on an exemption. This filing is not required if the acquisition is of a foreign company that has sales and assets in the United States of less than $60.9 million. Waze is an Israeli company with headquarters in Silicon Valley, so it comes under this test.

Waze probably doesn’t have $50 million in revenue worldwide, yet the test also looks at assets. Given that Waze is worth $1 billion, it is hard to see that the value of its intellectual property in the United States business doesn’t meet the test. And the F.T.C. has previously indicated that companies should include this type of intellectual property in informal guidance.

Nonetheless, Google appears to have taken this aggressive position and is forgoing any antitrust review, instead plunging ahead with the acquisition.

So why did Google do this?

A representative from Google declined to comment.

Google may be playing hardball with the government here. Psychologically, it may be harder for the government to undo something that is done. And once Google acquires this company, it will become harder to force it to undo any integration it may have done with its own services. (For now, Google has said it will keep Waze separate.)

Not only that, but the Waze owners may have wanted to sell precisely on this basis, avoiding this huge possibility that the United States government would reject the deal, a risk that Google may have been willing to take with Facebook and Apple hovering.

But given the publicity over the acquisition, the government will almost certainly step in to review. Consumer groups are circling, and the Consumer Watchdog Group has written the government to ask for an in-depth review. That group has noted that Google’s purchase of Doubleclick and AdMob led it to a 93 percent market share in mobile advertising.

As with previous deals, the government can force Google to sell Waze, or put other restrictions in place, if there is a problem.

The standard was set forth in a piece of legislation passed a century ago: Will the acquisition “substantially lessen competition”? In part, this will come from how the market is defined — if it is just maps, well, you have to include companies like Rand McNally.

If it is turn-by-turn maps on smartphones, then according to Berg Insight, Telenav has a 33 percent market share while Google and Waze’s combined North American market share would be 28 percent. But Telenav’s business is stagnant and Google’s grew 30 percent last year, while Waze’s business grew 100 percent, according to Berg.

It may all come down to how easy it would be for another company to replicate what Waze is doing — it built an enormous user base that made it worth a billion dollars.

Even if Google can show that this deal does not decrease competition, the acquisition can be unwound if Waze is found to meet Justice Department guidelines as a “firm that plays a disruptive role in the market to the benefit of customers.” André Malm, a senior analyst at Berg, told me, “There is nothing like Waze.” He noted that the company was shaking up the market, so the authorities will pursue this line of investigation.

Either way, the comments of Mr. Bardin are not going to help, but they do serve as a reminder to other start-up chiefs looking to sell to their competitor not to say they that are the only game in town.

At the least, this all means that the Waze acquisition is likely to get a thorough review by the government. The battle will now begin. That Google will keep Waze without restrictions is no certainty. But the government faces a challenge. If it does decide to try to unwind this acquisition, Google is going to push the bounds of the law as hard as it can. The future of map search is at stake, and Google may not be evil, but this is business.

Article source: http://dealbook.nytimes.com/2013/06/18/googles-effort-to-skirt-regulation-may-invite-more-scrutiny/?partner=rss&emc=rss