Google’s attracting a new sort of antitrust attention, this time on the exciting topic of HSR rules. Given that this blog is in large part about the intriguing intricacies of the Hart-Scott-Rodino Act, I guess I better weigh in.
But first, the background. It seems that Google acquired Israel-based Waze, a navigation and traffic app publisher, for just over $1 billion. Being an astute reader of this blog, I’m sure you immediately thought, “$1 billion, that’s way over the lowest HSR threshold, I bet they had to file a premerger notification.”
If you thought that, congratulations, give yourself a gold star. But then take it away again, because you may have missed a significant potentially relevant fact in there somewhere. If you were an extra-special astute reader, you would also have asked yourself, “hey, Waze is in Israel, is the transaction exempt as an acquisition of the voting securities of a foreign issuer under 16 CFR 802.51?”
Google, reportedly, concluded that the transaction was exempt under that rule and did not file an HSR notification, announcing that the deal had signed and closed on the same day. That decision has now prompted a lot of chatter about whether Google was somehow inappropriately exploiting some sort of loophole.
Let us consider the question.
The acquisition by a U.S. person of the voting securities of a foreign issuer is exempt unless that foreign issuer had $50 million (as adjusted) in sales in or into the United States or assets in the United States. The current “as adjusted” amount for the $50 million threshold, which changes annually, is $70.9 million. So if you’re buying the stock of a foreign company, no HSR notification is required unless that foreign company had U.S. sales in its most recent fiscal year or U.S. assets of more than $70.9 million, at least until the next annual adjustment in the threshold.
Google, obviously, is a U.S. person. Waze, apparently, is an Israeli issuer. So far so good.
Waze is also an app publisher, which, as we all know, means that it has next to no revenues even though someone is willing to pay $1 billion plus for it. Apparently it only recently began trying to generate revenue, so it’s probably safe to assume that it did not have U.S. revenues over the threshold.
Which brings us to the tricky question. What are Waze’s U.S. assets and what are they worth?
When we are trying to determine whether the size of person test is met, we look to a party’s financial statements to determine its assets. But not so here, where the relevant question is the fair market value of the assets it holds that are within the U.S.
Obviously, Waze holds something that Google apparently believes is worth paying $1 billion or more, or it wouldn’t be willing to pay that much. It does not appear that whatever is that valuable is a tangible asset (or even necessarily a future revenue stream).
So commentators are naturally asking whether what is so valuable is Waze’s IP. That seems like a fair assumption. But where is an intangible asset like IP located?
Google apparently decided that Waze’s IP is primarily located outside the U.S., such that the $70.9 million U.S. asset threshold was not met and the transaction was exempt from reporting.
Without additional information on the nature of Waze’s assets, it’s impossible to evaluate that determination from the outside. But we do know, for example, that Waze has at least some U.S. issued patents. It also seems reasonable to assume that it has other applications pending.
We also know that there is informal guidance from the FTC staff that indicates that the “location” of intangible assets may be influence by the location of any revenues that those assets generate. One means of determining the “location” of any Waze IP might therefore be to attribute value to the U.S. in proportion to Waze’s U.S. revenue. Give the sheer size of the U.S. market, and the substantial valuation that Google gave to Waze overall, you can see why people are scratching their heads over whether this transaction was appropriately determined to be exempt.
Regardless, it seems that Google/Waze is now under investigation by the FTC. If the FTC is investigating whether the transaction was actually exempt, and if it determines that Google inappropriately applied the exemption, Google could be subject to fines of up to $16,000 per day for violating the HSR Act.
But Google has good antitrust lawyers, so that seems rather unlikely. It’s probably safe to assume that Google considered the HSR question closely and has a defensible rationale.
Fines under the HSR Act, however, are not the potential consequences. Much of the chatter about the deal seems to assume that the FTC may look especially askance at the transaction if it views Google as having been aggressive in claiming the exemption.
I’m not sure that’s right. The FTC, or at least its Premerger Notification Office (PNO), is pretty good about not subjecting transactions that are not reportable to the HSR process. Where an exemption fairly applies, the FTC should actually reject a notification as outside its jurisdiction. But the investigative staff is not the PNO, and it’s possible that some members of the staff will let questions of reportability color their analysis in some small way.
Of course, we also know that a transaction need not be reportable in order to raise substantive concerns that it will substantially lessen competition. Any number of non-reportable deals have been challenged post-consummation in recent years.
Does it matter?
Overall, I’m inclined to think that it doesn’t matter much that Google did not file an HSR notification. On the one hand, the unavailability of the HSR process removes some of the FTC’s leverage in conducting an investigation. On the other hand, they know how to investigate and challenge non-reportable deals.
Which means, to me, the much more interesting question is whether the transactions substantially lessens competition in mapping apps. I’m not going to attempt to answer it at this time.