Microsoft-Yahoo Faces an Approval Gauntlet

U.S. and EU authorities will inspect the proposed acquisition, but thanks to Google's dominance, the merger should get a green light

Led by Representative John Conyers, the House Judiciary Committee plans to review the proposed Microsoft-Yahoo! merger. The deal will also face scrutiny from EU Competition Commissioner Neely Kroes. Getty Images

by Catherine Holahan

Third place is nothing to crow about—unless you're an attorney for Microsoft (MSFT). The world's largest software maker has never been proud of being a laggard in Internet search and advertising. But Microsoft's weakness on the Web may very well ensure it gains government approval for its proposed $44.6 billion acquisition of Yahoo! (YHOO).

And regulatory authorities have every intention of scrutinizing the deal. Hours after Microsoft announced its takeover bid, the House Judiciary Committee's antitrust task force scheduled a Feb. 8 hearing to discuss the proposed merger. The Justice Dept., which can restrict or block the deal, has also expressed "interest" in reviewing the merger.

Antitrust experts say any review is likely to be lengthy, given the overlap in Microsoft's and Yahoo's businesses, but ultimately decided in Microsoft's favor. "I don't think the deal has any obvious problems that would preclude it from going through," says Hewitt Pate, a lawyer with Washington (D.C.) firm Hunton & Williams, who served as an assistant attorney general in the Justice Dept.'s antitrust division until 2005.

Microsoft can thank Google (GOOG) for its anticipated approval. Google, the No. 1 search engine, dominates online advertising to such a degree that it poses significant competition for even a combined Microsoft/Yahoo. Google accounted for 56.3% of all Web searches in December, compared with a combined 31.5% for Microsoft and Yahoo, according to Nielsen Online. Google accounts for an estimated 42% of online advertising dollars. Microsoft, Yahoo, and Time Warner's (TWX) AOL combined grab about the same share of the market as Google alone, according to Jeffrey Rayport, founder and chairman of business strategy firm Marketspace.

EU Scrutiny

Typically, Microsoft has fielded probes by antitrust regulators in connection with its dominance of software—in particular, computer operating systems. "The shoe is on the other foot," says Mark Ostrau, co-chair of the antitrust group at Fenwick & West, a technology law firm based in Mountain View, Calif. "Microsoft can finally get their day to argue that there is someone else out there who is bigger."

Google nonetheless will try to convince regulators that the combination could imperil innovation and curtail consumer choice in key products, such as e-mail and instant messaging. "Could Microsoft now attempt to exert the same sort of inappropriate and illegal influence over the Internet that it did with the PC?," Google Senior Vice-President David Drummond asked in a Feb. 3 blog, the company's first public statement on Microsoft's attempt to buy Yahoo. "Could a combination of the two take advantage of a PC software monopoly to unfairly limit the ability of consumers to freely access competitors' email, IM, and web-based services?"

Regardless of how it fares in the U.S., the deal will surely come under stricter scrutiny in Europe, before the European Commission. The European Union's executive branch has already ordered Microsoft to share the codes associated with its operating system (BusinessWeek.com, 10/22/07). And the commission has delayed Google's planned $3.1 billion purchase of ad network DoubleClick (BusinessWeek.com, 11/14/07) to hear more about the anticompetitive issues. It has until Apr. 2. to decide whether it will block the deal.