The Google-ITA Merger Review Approaches the Finish Line

The Google-ITA Merger Review Approaches the Finish Line

The Department of Justice appears to be in the final stages of its review of Google’s acquisition of ITA Software.  Several travel sites, some (but not all) of which use ITA, oppose the deal.

Google is reportedly willing to honor ITA’s existing contracts with customers and to renew them.  Some of those customers who oppose the deal now want Google also to make available upgrades to the ITA software.  DOJ is reportedly considering challenging the deal if Google does not make such a commitment even though 6 other companies produce and market travel software.  In fact, the three biggest travel sites—Expedia, Travelocity, and Priceline—do not use ITA software.

Former DOJ chief economist Bruce Owen, in a recent paper, “Antitrust and Vertical Integration in ‘New Economy’ Industries,” prepared for a TPI conference, “Antitrust and the Dynamics of Competition in High Tech Industries,” found that the empirical evidence shows that vertical integration is generally welfare enhancing, even when market power is present.  This suggests there is a high bar for blocking an acquisition such as Google’s acquisition of ITA.

Owen made a more general observation that is perhaps even more noteworthy.  Merger reviews focus on the specific transaction under review, but the more important effect may be the signals that the authorities send about how they will view future transactions.  These signals are incorporated into the risk assessments and investment decisions of potential acquirers (e.g., Google) and acquirees (e.g., ITA).

By making it difficult for Google to improve its search engine product by incorporating better travel search features the government is sending a signal to large companies, particularly in the tech sector, that it is going to make it difficult for them to improve their products, at least by acquisition.  Other things equal, this reduces the potential acquirer’s value.

The signal sent to ITA and other potential acquirees is that it is going to be more difficult for them to be acquired.  Making a major exit strategy more difficult reduces the expected payoff to venture capitalists and other investors and, hence, their willingness to risk their capital.  Requiring Google to make its upgrades available to competitors would certainly diminish the value of ITA to Google.  Google might walk away from the deal altogether or go through with it and let DOJ sue.

Even if Google accepted the condition and closed the deal, being required to make software upgrades available to competitors would presumable reduce the incentives to upgrade.  Such a condition also raises the question of how the upgrades would be priced and whether the Justice Department would become involved in pricing decisions.  (This pricing issue arises even if Google commits only to make the existing product available.)

Some improvements might be Google-specific.  Would Google have to make those improvements available, possibly compromising proprietary information?  Would a court decide which improvements were specific to Google and which were more generally applicable?  Such determinations could easily turn into quite a mess.

The most important consideration for the antitrust authorities is the effect on consumers.  Enhanced travel search capabilities that are part of the Google search engine have the potential to produce significant benefits for consumers.  Those benefits, and broader benefits that could result from other tech acquisitions down the road, may be lost if DOJ kills the Google-ITA deal by putting too many conditions on it.

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