Antitrust attorney: Microsoft-Yahoo deal won't pass regulatory muster

Microsoft argues the search deal will increase competition against behemoth Google

A prominent antitrust lawyer predicts that Microsoft and Yahoo's new partnership won't pass muster with government regulators because it would narrow search competition.

Matthew Cantor, a partner at Constantine Cannon LLP in New York, said that when Yahoo's own search tool disappears, only two major search engines will remain -- Google and Microsoft's Bing.

"I obviously can't predict with certainty how the DOJ will react to it, but I think there's a very good chance it will force [Microsoft and Yahoo] to modify the deal at the very least if they do not block it outright," said Cantor, who has litigated several major antitrust cases. "Even though it's a partnership, it will be evaluated like a merger ... because Yahoo ceases to be a competitor in search. Yahoo is going to use Bing technology for their sites. I think there's no question the DOJ will come to the conclusion that the deal is anticompetitive."

Cantor noted that concerns in the antitrust division at the U.S. Department of Justice killed a proposed advertising partnership between Google and Yahoo last year. He predicted that the proposed Microsoft-Yahoo deal will meet the same fate.

Microsoft and Yahoo late last month announced that they had finalized negotiations on a deal that will have Microsoft's Bing search engine powering Yahoo's sites, while Yahoo sells premium search advertising services for both companies.

The partnership, which was a year and a half in the making, is aimed at enabling the companies to take on behemoth Google as a united force. Some analysts say that the Microsoft-Yahoo partnership could give the two companies some much-needed leverage in their ongoing -- and, until now, separate -- and unsuccessful battles to loosen Google's stranglehold on the search market.

Microsoft officials contend that the company's long-anticipated deal with Yahoo will improve competition in the search market.

Jonathan Kanter, a partner at Cadwalader, Wickersham & Taft LLP and outside counsel for Microsoft, said Google has a monopoly in online search and needs a strong competitor like a combined offering from companies like Microsoft and Yahoo.

"Our view is that Google is the dominant player in this space by a long shot," said Kanter, who added that the firms hope the deal will close by mid 2010. "When you have a market like this with one dominant player, advertisers and others are starving for more competition. If both companies separately don't have the scale to effectively compete against Google, combined they will create a more credible alternative -- and one that will attract more advertisers. At the end of the day, what matters is the effect on competition."

In an e-mail, Yahoo told Computerworld that the deal with Microsoft is aimed at boosting search competition. "We are confident in the merits of the deal and look forward to working with regulators throughout the process," said a Yahoo spokesman.

Microsoft has had antitrust issues of its own over the years in the U.S. and Europe, and Cantor said that probably will spur the U.S. government and European Commission examine the deal closely.

"Microsoft will say they need this merger to defend against this giant, Google," said Cantor. "That's not a credible argument. We're talking about a Microsoft that has more cash resources than almost any business in the world. They've spent years and tremendous resources creating Bing, which has gotten great reviews. They weren't pouring all these millions of dollars into Bing because they think they can't compete."

The antitrust attorney said he also expects that U.S. regulators will force Microsoft and Yahoo to amend the deal so that a third competitor remains, which could force Yahoo to either split off its search arm into a separate business or sell that business to another company.

Microsoft's Kanter said he doesn't foresee splitting up Yahoo.

"It's very premature to suggest there would be any need for any sort of change to the transaction," he added. "What matters at this stage is if this transaction will be good for competition."

Copyright © 2009 IDG Communications, Inc.

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