Time Frame Of Google And Motorola Mobility's Merger Is Uncertain

Includes: GOOG
by: Ivan Mutaftchiev

The acquisition of Motorola Mobility (NYSE:MMI) by Google (NASDAQ:GOOG) is one of the biggest M&A deals in the tech space for 2011. It was recently suggested by my respected fellow SeekingAlpha contributor, Joe Escalada of Value Research, that investors could do very well by buying $39 January 2012 calls for $.65, as the deal will close by December 31, 2011. At or right before the closing of the deal, the $39 calls will be worth $1.00 (as Google is buying MMI for $40 a share) giving the call buyers a nice return of $.35 for the calls they bought for $.65.

While the profit calculation is true (and very enticing) it assumes that the merger will be consummated by 12/31/2011. This date is speculative, and frankly, it appears that Mr. Escalada plucked it out of thin air. As the January 2012 calls will expire on January 21 2012, they will likely be worth less than their current price or even zero at expiration, unless the deal closes before the expiration. In my opinion, as the merger will likely go through in the first or second quarter of 2012, buying a call is a bet on the timing of the closing-- and in this particular M&A situation, it increases the risk exponentially.

I have reviewed all the publicly available information by Google and Motorola regarding the merger, and nowhere is the date of 12/31/2011 mentioned by the parties involved. In an 8-K filing from October 27th MMI stated, "Subject to the satisfaction of customary closing conditions, including antitrust clearance, the transaction is expected to close by the end of 2011 or early 2012. The failure to meet the closing conditions or other factors outside of our control could delay the transaction or prevent the companies from completing the merger." This is an optimistic "guesstimate" by the two companies, as there are a multitude of factors that may delay the closing and even (although highly unlikely) cancel the deal altogether.

Regulatory Approvals. A deal approval by the FTC or the Dept. of Justice Antitrust division is needed, as in most mergers. I'm not expecting that the FTC will go against the deal, as the two companies are not competitors and their merging will not create a monopoly in any of their core industries. Still, securing the approval is not a done deal by any means, and it may take a few months.

On August 29 Google and Motorola sent the required merger notifications to the FTC. Often the FTC will decide that further review is not needed, and that would be the end of the regulatory approval process. In this case, the FTC on September 29 requested additional information. The companies stated their full intention to comply with the request and supply all requested information within 4 months (see Proxy statement of October 14 here ). This stretches the reply of the merging companies to as late as January 29 2012. They may be able to comply earlier than this self-imposed deadline, but considering the amount of work at hand, and the wide array of businesses the two giant companies are involved in, I don't believe it will be before early January 2012. At the time the parties certify they have complied with the FTC's request, the final review period of 30 days will begin, by the end of which (but possibly earlier) the FTC will announce its final determination. This is possibly another 30 days after January 29 2012, or around March 1.

International Regulators Approval. Because Google and Motorola are truly global companies that do business around the world, they have a substantial presence in many countries and so local regulators' approval will be needed. The Proxy Statement discloses that antitrust approval will be required and sought in the European Union, and also Turkey, Israel, Russia, China and Taiwan among others. All approvals have already been applied for, but as of this article no foreign regulatory authorities have given their blessing. In the U.S. the HSR Antitrust Act requires that the FTC has 30 days from receiving the merger notification to give its answer or request additional information. Once additional compliance has been provided (as in the Google-Motorola merger) the FTC again has 30 days to make its final determination. I am not familiar with other countries' antitrust process but I am sure that not all are as pro-business as the American, and in some more bureaucratic countries the process can probably drag along for months.

Conclusion. Regardless of the possible and even likely delays listed above, I believe that the merger will close in Q1 or Q2 of 2012. I believe that at the end regulators will approve the deal. Financing the deal will not be a problem for the cash rich Google, and MMI shareholders will vote for the merger (after all, MMI is not profitable and was trading around $25 before the deal was announced). Investors buying the MMI stock at $39 will-- with great likelihood-- make a 2.5 % return, probably within the next 3-4 months (or 7.5% annualized). If using margin, their return will double to 5% or 15% annualized (less margin fees). Any delays in closing the deal while delaying the payoff will not lead to losses. On the other hand, using calls is a bet on the timing of the deal, which in a complicated global merger like this one can be risky and even reckless.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.