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Google's US$2.5 bn guarantee

16 Aug 2011

With the tech industry still reeling at the news Google has moved to purchase phone maker Motorola Mobility for US$12.5 billion, some attention has turned to the rumour the search giant offered a massive 20% reverse breakup fee as part of the deal.

An industry insider told Bloomberg that Google has agreed to pay Motorola US$2.5 billion if the deal doesn’t go through.

Typically, reverse breakup fees are between 3% and 5% of the sale price, and are paid if purchases are rejected due to matters such as market regulation.

Motorola, for its part, will pay Google US$375 million if it pulls out of the deal.

Bloomberg cites Columbia Business School senior lecturer in finance, Donna Hitscherich, who says a high breakup fee indicates high confidence on the part of the buyer.

However, the converse of that must be an element of scepticism on the part of the seller, who has chosen to optimise this element of the deal over others.

Google’s search business is already under investigation by the Federal Trade Commission and the US Senate, and some commentators have suggested the Motorola Mobility deal could suffer similar regulatory scrutiny.