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Regulators Would Watch Any Google-Yahoo Tie-up

Google might be able to stymie Microsoft's bid to buy Yahoo by forging a deal to run Yahoo's Web search operations or buy a minority stake -- but even that risks the ire of antitrust regulators.

Microsoft on Friday offered to pay $44.6 billion for Yahoo, an ailing Web star that has been under pressure from Wall Street to either cut jobs or make more money on advertising. To fend off Microsoft's overture, a Yahoo source said on Sunday the search company would consider a business alliance with Google.

Google, which has 58.4 percent of the U.S. Web search market, would probably be prevented by U.S. antitrust enforcers from buying Yahoo, which holds 22.9 percent of the search market, according to ComScore, antitrust experts said.

"The probability that (a Google-Yahoo deal) would pass antitrust muster is a lot lower than the Yahoo-Microsoft deal would pass muster," said Luke Froeb, a former director of the U.S. Federal Trade Commission's Bureau of Economics.

Aaron Edlin, who teaches law and economics at the University of California in Berkeley, said Google could help Yahoo stay out of Microsoft's grip with a carefully targeted buy like "an investment in stock, 10 or 20 percent, a noncontrolling interest."

Google and Microsoft are bitter rivals. Microsoft staunchly opposed Google's offer to buy advertising company DoubleClick for $3.1 billion last year, but U.S. antitrust regulators approved the deal in December.

One alternative that Yahoo and Google appear ready to consider is to revive an old arrangement where Yahoo relied on Google to power Web searches on its site. Yahoo was Google's highest profile customer from 1999 to early 2004.

Regulators would still have the option to stop such a partnership, though it could prove lucrative to Yahoo. Google has a three-year, $900 million deal to run searches for MySpace, the world's largest social network site.

"Google and Yahoo have a longer history of working together than Yahoo and Microsoft," said Sandeep Aggarwal, an analyst with Oppenheimer & Company in San Francisco. "Yahoo has to make a decision about how much upside they make from working with Google as a partner versus selling out to Microsoft."

While any deal between Yahoo and Google would reflect a hard-nosed business decision, many cultural ties join the two Silicon Valley Internet giants.

Aggarwal says one big appeal of Google's search advertising system is that it generates 45 percent more revenue per search than Yahoo's own search system and at least that percentage relative to Microsoft searches. David Lisi, a lawyer with Howry, said that even licensing searches from Google could draw regulatory concern -- though not necessarily an outright rejection.

"Technology having moved on ... now they're competitors," he said. "It's the kind of thing that regulators would take a look at. I can't tell you what they'd decide."

Lisi said that Yahoo might consider breaking itself up but called that possibility "very remote."

He added, "I think Yahoo is looking for the third alternative. Nobody wants to get into a bidding war with Microsoft but Yahoo will offer licensing," he said, adding that Google may try to convince a media or other company to partner with Yahoo.

In this hypothetical situation, Lisi said that Google might say, "'We will sweeten the pot and be a strategic partner with Yahoo.' That might be enough."