Microsoft and Yahoo!: Happily Ever After?

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Regulatory and Cultural Hurdles

Yahoo executives still might balk at the deal. They have been cool to the idea of selling out because they believe they have the pieces in place, such as a base of 500 million monthly visitors, improved search-advertising technology with the year-old Panama project, and new display-ad targeting technology from last year's acquisitions of Right Media and BlueLithium, to return to some semblance of its former glory. But after a fourth quarter in which it announced a muted outlook for 2008, knocking its stock down 8.5% on Jan. 30, its leverage was fading. In a statement, Yahoo said it would "evaluate this proposal carefully and promptly in the context of Yahoo's strategic plans and pursue the best course of action to maximize long-term value for shareholders."

Assuming Yahoo agrees, Microsoft will still need to get the deal past regulators. The company believes the acquisition will stand up to the regulatory scrutiny. The House Judiciary Committee said on Feb. 1 it will hold a hearing to discuss the proposed merger on Feb. 8. While congressional leaders don't have the power to block planned acquisitions, their attention to such matters can influence the regulatory bodies that do.

In a statement, the antitrust division of the U.S. Justice Dept. said it is "interested in looking at the competitive effects of the proposed transaction." Given the DOJ and Federal Trade Commission's recent history of approving billion-dollar ad network deals, many believe the merger will ultimately be approved.

Maybe the biggest challenge Microsoft will face is cultural. Yahoo's 14,300 employees come largely from the Silicon Valley world that loves to hate Microsoft. "Yahoo has always considered itself a bit of an upstart," says a former Yahoo employee who asked to remain anonymous. "Most Yahoo employees will feel that, A., we lost, and B., there is no way in hell that I am going to work for Microsoft."

Greene is BusinessWeek's Seattle bureau chief.
With Catherine Holahan in New York and Robert D. Hof in Silicon Valley.