Microsoft-Yahoo: Antitrust Hurdles Loom

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The Federal Trade Commission quashed a proposed February 2000 merger between Beech-Nut and H.J. Heinz (HNZ), the No. 2 and No. 3 players in the baby food industry, which each wanted help to take on Gerber Products. Gerber controlled 65% of the market, while Heinz had 17% and Beech-Nut claimed 15%.

Big Plus: Yahoo's Failure to Compete

Heinz and Beech Nut's parent companies defended the proposed deal on grounds that the savings created by the merger would benefit consumers far more than they would be harmed by any potential anticompetitive effects. But regulators successfully argued that the merger would reduce competition for baby food and lead to higher retail prices. "The general theory is that two firms is too few to have optimal competition," says Herbert Hovenkamp, an antitrust expert who is professor of law at the University of Iowa. "Three is too few as well."

Another challenge facing Microsoft and Yahoo is the need to demonstrate that the benefits of their merger could not be achieved without such a union. Antitrust experts say this is where Microsoft and Yahoo could find some room to maneuver. A good argument could be made that Yahoo has been unable to compete against Google, and that by using Microsoft's search technology, it could start to take share away from Google and provide consumers and advertisers with a better search experience. "There is a compelling case that this is going to increase competition," Brad Smith, Microsoft's general counsel, said during a conference call. To make their case, the companies have set up a special Web site, www.choicevalueinnovation.com.

If regulators do not move to quash the deal, they could still force the parties to revise it. White, the former Justice Dept. official, says regulators may force Microsoft and Yahoo to reduce the agreement's length—which at 10 years is unusually long. "Maybe they cut it back to three years," says White. Another element that could draw scrutiny is the clause that gives Yahoo the exclusive right to sell search ads, which may be viewed as anticompetitive. "Why does there have to be this extra getting-into-bed element?" asks White. "Why not just pay Microsoft? This looks like an invitation to collude."

Ultimately, politics may play a huge role, as it often does with antitrust policy. That doesn't bode well for Microsoft and Yahoo. In her first speech after becoming the nation's top antitrust cop in April, Christine Varney said the following month that she wants the Justice Dept. to examine "high-tech and Internet-based markets" and become a leader in applying antitrust law to the tech industry. During a speech before the American Antitrust Institute in June 2008—before she was appointed to the Justice Dept.—Varney said the next Administration needs to "find the right cases to begin to push back on some of the doctrine that may have gotten too extreme in the last decade."

That's why the many legal experts who had been expecting Varney to use Google as her primary test case are eyeing Microsoft-Yahoo as the case she may have been given to update antitrust law for the digital age.

Ante is an associate editor for BusinessWeek.

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