Contact: Brenon Daly
Breaking up is hard to do. And it can be expensive, too. But as a pair of deals this week shows, the costs aren’t necessarily borne equally by the two sides in a planned transaction. In the higher-profile case, the market is buzzing that Google may be on the hook for a $2.5bn payment to Motorola Mobility if that deal unravels. If that’s the case, the payment (known as a reverse breakup fee) would be 6-7 times larger than the payment Google would stand to pocket if Motorola Mobility walks away from the transaction.
That gap is much wider than is seen in deals that feature reverse breakup fees, where a would-be buyer might face a fee that would be closer to twice the amount the seller might pay. That’s how it is, for instance, in Permira’s planned $440m buyout of education software maker Renaissance Learning. According to terms of Tuesday’s leveraged buyout (LBO), if Permira walks away from the transaction, it will have to come up with $26m, or nearly 6% of the equity value of the proposed deal. On the other side, if Renaissance Learning backs away, it will have to hand over just $13m, or about 3% of the equity value.
Reverse breakup fees have long been an accepted way for a would-be seller to receive compensation for any risks in getting a transaction closed. (The rationale is that the disruption in business due to an acquisition is much greater to the target company than the acquirer, so the greater potential risk is offset by a greater potential reward.) Of course, these fees are far more common in LBOs than when the deal is struck between two companies, like Google buying Motorola Mobility. But then again, the search giant – going back to its Dutch auction IPO and continuing to today’s practice of not giving quarterly financial guidance – has never been a company that really follows Wall Street convention.