Google’s M&A machine stuck in antitrust limbo

April 4, 2011

By Rob Cox
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Not long ago, selling to Google offered one of the best alternatives to an initial public offering for up-and-coming technology startups. YouTube did it. So did AdMob — along with 70 or so other companies from 2005 through the end of last year. But Google’s M&A machine looks to be gumming up.

The search monolith hasn’t lost its desire to expand. On Monday it was reported to be looking at buying patents from bankrupt Nortel Networks, for example. Nor is it lacking for money. Google is sitting on $45 billion of cash generating paltry returns and just waiting to pounce on good ideas, emerging technology and budding talent. And it should generate around $10 billion more of free cashflow this year.

The problem is antitrust limbo. Google’s dominance of the search advertising market has everyone worried. And it’s not just competitors like Microsoft. Regulators, and even some customers, express concerns Google may have too much market power.

Ironically that may make it less appealing to sell to Google. The company has announced just $200 million of acquisitions in 2011 — the smallest sum since the panic of 2008. Moreover, its only sizable deal of last year — the $700 million purchase of ITA Software — has yet to close after nine months amid a review by the Department of Justice.

The ITA acquisition has sent a warning signal to the venture capital and startup communities. Patents may still be available. But no fast-moving entrepreneur wants to get stuck the way ITA has since agreeing to be sold last July 1.
A dragged-out approval doesn’t just put management and staff in an anxious state. Customers and partners, too, are left wondering what concessions might be forced by watchdogs. The longer it lingers, the worse it can be. For a small, growing business the risks are huge.

That doesn’t exclude Google as an exit option. But the regulatory risk needs to be hedged with a huge breakup fee. That way, even if regulators nix the deal, shareholders have a consolation prize. With Google’s rising antitrust issues, however, the fee needs to be as big as the purchase price. For co-founder Larry Page, it’s one more challenge to confront as he returns to the chief executive role.

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