What’s Waiting For Microsoft-Yahoo in Washington?

The first wave of government inquiry into Microsoft’s bid to acquire Yahoo will break another day. But rest assured, it’s coming.

Citing scheduling issues, the House Judiciary Committee has postponed today’s hearing on the state of competition on the Internet, slated to feature testimony from an undisclosed roster of experts on the potential competitive problems that would result from combining the two companies.

Committee Chairman John Conyers, D-Mich., and ranking Republican member Lamar Smith of Texas announced the hearing on Feb. 1, just hours after Microsoft sent a shockwave across the tech world with its unsolicited $44.6 billion bid for Yahoo.

“Microsoft’s bid to acquire Yahoo is certainly one of the largest technology mergers we’ve seen and presents important issues regarding the competitive landscape of the Internet,” the representatives wrote in a joint statement announcing the Judiciary hearing. “The Committee will hear from experts who will weigh in on whether this proposed consolidation works to further or undermine the fundamental principles of a competitive Internet.”

A spokesman for the Judiciary Committee told InternetNews.com that the acquisition remains a top concern, and that the hearing would be rescheduled as soon as possible.

[cob:Related_Articles]In the Senate, Herb Kohl, the Democratic chairman of the antitrust subcommittee, has said that he would move quickly to convene hearings should Yahoo accept the bid.

Though Congress does not have the authority to block a corporate merger, the legislative hearings can raise awareness and put pressure on regulators to apply conditions to safeguard competition within the relevant markets.

Just which markets are relevant to the competition considerations will be one question for the government to decide in its review, Blair Levin, analyst at Stifel Nicolaus, told InternetNews.com. The essence of the case that Microsoft will make to regulators is that joining forces with Yahoo is the only way to compete with Google in the search-advertising market.

Last Sunday, Google’s Chief Counsel David Drummond shot back in a blog, calling on regulators to look closely at the combination of the two largest portals on the Internet, and raising the question that Microsoft could leverage its operating system to restrict access to competitors’ services like e-mail and IM.

Levin is skeptical. “Ultimately, I don’t think it’s going to be successful,” he said. “Generally, antitrust folks are looking at revenue streams,” so free Web services would take a backseat to paid-search ads in any merger review.

Glenn Manishin, a partner with the international law firm Duane Morris, shares Levin’s assessment of the primary focus of any regulatory review. In a conference call with analysts at the investment firm UBS, Manishin said that regulators would primarily consider search and advertising, though he held out the possibility that the integration of the two companies’ services and software might become a sticking point. He suggested that a Microsoft might have to agree to divest or spin off some non-critical pieces as a condition of approval.

Approval by whom?

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Approval by whom?

Approval by whom is another question. The matter of jurisdiction among regulators remains murky. Levin believes that the Department of Justice would review the matter, given the special arrangement that stipulates its jurisdiction in any federal review of Microsoft cases. DoJ oversight of Microsoft dates back to the 2002 settlement of the antitrust suits brought against the software giant over unfair practice claims involving its operating system.

If the DoJ is an old friend of Microsoft’s, the other regulatory group that could preside over the merger — the Federal Trade Commission — is no stranger to Google. In December, the FTC approved Google’s $3.1 billion purchase of DoubleClick, a leading company that places display advertising. That approval came in spite of strident protests from Microsoft that the deal would further undermine competition in the Internet advertising market. The Google/DoubleClick review is pending in Europe, though approval seems likely.

Google commands a 58 percent share of the search market, compared with a combined 33 percent between Yahoo and Microsoft, according to online metrics firm comScore. Those two figures make a compelling argument that a merger would improve competition, Levin said, even if the combined company would have to shed some of its services, as Manishin mentioned.

No matter how it is packaged, a merger of Microsoft and Yahoo could be much more palatable to antitrust regulators than any form of alliance between Google and Yahoo, experts have warned.

It has been widely rumored that Yahoo might consider outsourcing its search or advertising placement services — or both — to Google in an attempt to placate shareholders without succumbing to Microsoft’s takeover bid. Unless Yahoo could demonstrate that it is a “failed company,” and therefore exempt from certain antitrust restrictions, regulators would be likely to scotch an alliance with Google, Manishin said.

The presidential election could also have some bearing on any review. Antitrust proceedings are supposed to be apolitical, but, as a general rule, Democratic administrations scrutinize corporate mergers more closely than their Republican counterparts, which could prolong or impose stricter conditions on approval.

This year, regardless of which party wins the White House, there will be a major personnel churn that is likely to begin before any review could be complete. “A funny thing in Washington is, people start disappearing in the last year of an administration,” Levin said.

The election churn in Washington, coupled with the intense scrutiny the acquisition would be certain to face from international regulators, could push a final decision into 2009, Manishin said.

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