Google’s takeover of Motorola is not yet a done deal

Motorola Mobility (NYSE:MMI) and Google (NASDAQ:GOOG) entered into a definitive agreement in August of last year whereby Google agreed to acquire Motorola for $40 a share or $12.5 Billion. At the time, this represented a 60%+ premium to Motorola’s closing price the previous trading day. As a value investor, I was fortunate to have owned Motorola shares in client accounts before the merger was announced. Knowing that the acquirer was Google, I was pretty assured that the deal will promptly close by the end of 2011 or early 2012 as had been announced since Google had all the financial resources needed to close the deal. However, the deal had to be cleared by Anti Trust regulators in both the US and the European Union. When in late September the Anti Trust Division of the US Department of Justice sent both companies a request for more information I, along with many investors, deemed it a routine request and that the merger will be cleared by the DOJ. Then in early December, the European anti-trust review process was suspended as regulators requested more data as well. Investors grew more wary and Motorola’s stock was trading below $38 in early January. This is pretty important as the difference between the price Motorola shares were trading at and the merger price, known as the arbitrage spread, was rather large for a merger expected to close within 30 days.

It seems that both the DOJ and EU are about to submit their verdict as soon as next Monday according to the Wall Street Journal. Now I have no particular insights as to how the decision will go but there are basically 3 decisions that each regulatory body can take: Approve the merger, deny the merger, or submit a mixed verdict such as a partial approval if certain actions are taken. For all of you math geeks out there, this means that there are 9 different outcomes and they are listed below.

Outcome	DOJ	EU
1	Approve	Approve
2	Approve	Deny
3	Approve	Partial
4	Deny	Approve
5	Deny	Deny
6	Deny	Partial
7	Partial	Approve
8	Partial	Deny
9	Partial	Partial

To reach the merger Promised Land, outcome 1 above needs to happen which means that there is a meeting of the minds between the two regulatory bodies. It can very well happen but there is a chance, however slim, that it might not. Google has been making efforts to allay fears that it will not fairly license the vast trove of Motorola patents to competitors. This may do the trick – but then again it may not be enough.

Motorola’s stock closed at $39.35 on Thursday, 1.6% below the $40 merger price. If the merger indeed gets approved then you will likely earn that extra 1.6% by the end of February when the merger closes – if you currently own the stock. However, if any outcome above other than outcome 1 is rendered next week then Motorola’s stock is likely to lose more than 1.6% – a lot more probably. If you own the shares, look at the February $38 and $39 Motorola Put Options (which expire on February 17). You can buy insurance at $0.10 a share and protect yourself from a much bigger downside in case the deal is not approved or delayed. If you don’t own the shares, then looking at those same Put option will give you exposure to a real grey swan trade that can payoff very big but will cost you little.

Disclosures: I no longer own Motorola shares but I maintain a miniscule exposure in Motorola Put options.

Tagged NASDAQ:GOOG, NYSE:MMI