Shares of Alphabet (GOOGL) are under pressure on Thursday after the Department of Justice said Google should have to sell off its Chrome browser as part of a court-ordered remedy to its monopolization of the online search market. Analysts at Evercore ISI say the DOJ’s initial proposed final judgment “looks draconian,” with peers at Baird saying the remedies are unlikely to be approved by the court.
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RECOMMENDED REMEDIES: As part of a court-ordered remedy to its monopolization of the online search market, Google might have to sell off its Chrome browser. Lawyers for the Department of Justice said competition can only be restored if Google splits its search engine from products it has built to access the internet, such as Chrome and its Android mobile operating system. Alongside the divesture of the Chrome browser from Google, the recommended remedies to solve the anti-trust case include search-engine choice, data sharing, consumer education, and prohibition on self-preferencing.
Following the news, Kent Walker, Chief Legal Officer for Google and Alphabet said, “As part of its lawsuit over how we distribute Search, the U.S. Department of Justice tonight filed a staggering proposal that seeks dramatic changes to Google services. DOJ had a chance to propose remedies related to the issue in this case: search distribution agreements with Apple, Mozilla, smartphone OEMs, and wireless carriers. Instead, DOJ chose to push a radical interventionist agenda that would harm Americans and America’s global technology leadership. DOJ’s wildly overbroad proposal goes miles beyond the Court’s decision. It would break a range of Google products – even beyond Search – that people love and find helpful in their everyday lives… We’ll file our own proposals next month, and will make our broader case next year.”
UNLIKELY TO BE APPROVED: Baird called the remedies “a wish-list of restrictions on Google that stray well beyond the court’s ruling.” The firm believes shares of parent Alphabet are trading lower on the recommendations related to the Apple (AAPL) search agreement and remedies that “in a worst-case (unlikely) scenario” could seriously damage Google’s competitive position in search and GenAI. With that said, Baird views many of the DOJ’s recommendations as “unlikely to be approved by the court, or to survive an appeals process.” The firm keeps an Outperform rating and $205 price target on Alphabet shares.
DRACONIAN PROPOSAL: Evercore ISI believes the government’s proposed array of remedies was “mostly as expected” given press reports in recent days indicating that the government would propose forced divestiture of Chrome and a potential divestiture of Android. However, the firm views the government’s proposed limitations on distribution agreements as “draconian” and given the roughly 6% downward move in Alphabet shares today calls this “likely a negative surprise vs. investor expectations.” The firm’s “quick checks with legal experts” suggest a near-term negotiated settlement is unlikely and that the case could continue to act as an overhang on shares until a final judgment on remedies is received, likely in August of next year. Evercore maintains an Outperform rating and $205 price target on Alphabet shares.
QUERY SHARE REDISTRIBUTION: Commenting on the news, JMP Securities notes that while this is an initial PFJ with plaintiffs asking for a lot, the requests do represent a worst-case scenario for Google as it prevents Google from paying Apple for distribution, while the divestiture of Chrome and lack of payment for distribution would likely force Chrome to adopt Microsoft’s (MSFT) Bing, the firm explains. With defaults important in creating usage, this could materially shift query share if plaintiffs get the full list of requests, which would materially lower the firm’s search estimates. While Chrome could be worth about $50B, JMP believes this would destroy about $400B of market cap for remaining Google. The firm has an Outperform rating on Google with a price target of $220 on the shares.
BREAKUP SOMEWHAT UNLIKELY: Stifel views a breakup as “somewhat unlikely, given precedent,” and struggles to come to a reasonable conclusion as to who might be “a natural acquirer that could actually get this across the goal line.” However, the end result will be that of prohibiting Google from paying for exclusive/default status on third party browsers, says the firm, which adds that it imagines the appeals process will take a year-plus to conclude. Stifel maintains a Buy rating on shares of Google parent Alphabet.
PRICE ACTION: In Thursday afternoon trading, Class A shares of Alphabet have dropped over 5% to $166.43.
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