Microsoft-Yahoo Deal Probably Would Clear Review, Analysts Say

Review of a Microsoft-Yahoo deal would be more complex than that accorded the Google-DoubleClick merger, said Stanford Group analysts Paul Gallant and Jaret Seiberg. The FTC has the edge for leading review thanks to its experience with Google-DoubleClick, and the agency likely would look past online advertising for other markets where Microsoft and Yahoo compete. But DoJ may call dibs, given its antitrust history with Microsoft, and Congress traditionally has scrutinized Microsoft deals. The thumbs up or down may have to wait until the Bush administration’s last days, they said. But since the companies’ combined market share in display and search advertising is around 25 percent in each category, far below Google alone, the FTC isn’t likely to intervene, they said.

European review could “easily drag out,” considering the Continent’s continuing antitrust fight with Microsoft and intensified scrutiny of Google-DoubleClick, said the Stanford analysts. But the EU is unlikely to try to stop the merger, for fear of souring antitrust relations with the U.S., they said. Concessions are likelier to be demanded on privacy issues, the analysts said.

Stifel Nicolaus analysts predicted a “super Internet antitrust showdown” among regulators worldwide, with DoJ more likely to get review due to its antitrust history with Microsoft. The search engine market is concentrated, and a merger that reduces the market from three to two major players usually invites extended scrutiny, but Microsoft and Yahoo can convince DoJ that the threat from Google justifies the merger, they said. Since no costs arise switching between search engines, the companies could argue that anticompetitive behavior is unlikely.

But Microsoft and Yahoo’s strong advocacy against Google-DoubleClick “may come back to haunt them,” since they outlined “various theories of competitive harm,” Stifel analysts said. The ad world’s response will be crucial to regulators’ view of the deal, they said. Microsoft may have to make some hard concessions on its operating system, still under review in Europe, to get the deal through, they said.

Congress is already angling to get involved. The House Judiciary Committee’s Task Force on Antitrust and Competition Policy set a hearing Feb. 8 on the proposed merger. Chairman John Conyers (D-Mich.) and Ranking Member Lamar Smith (R-Tex.) said they will give the proposal “a careful examination,” with help from experts advising then on whether the merger “works to further or undermine the fundamental principles of a competitive Internet.” But a spokesman for House Commerce Committee Ranking Member Joe Barton (R-Tex.) told us Barton wouldn’t weigh in anytime soon. Barton emerged as a critic of the Google-DoubleClick deal due to privacy concerns (WID Dec 13 p6).

Privacy as ‘Non-Price Competition’

Competition for privacy in search could erode if the merger went through, said Peter Swire, Ohio State University law professor and Clinton administration privacy counsel. Last summer, the major search engines set data retention limits on search queries and other data, with Microsoft committing to 18 months and Yahoo, 13 (WID July 24 p1). Swire called Google-DoubleClick the “warm-up act” for Microsoft-Yahoo, creating a precedent at the FTC for considering privacy an element of “non-price competition.” Agencies are likely to study how Microsoft and Yahoo databases of personal material would merge, how their combined privacy policy would look, and what privacy-related guarantees could be added to the policy, Swire said.

The Center for Digital Democracy warned that the combined companies would have “inordinate power to shape the online communications marketplace, including journalism, entertainment and advertising.” The FTC set the stage for this by refusing to conduct an antitrust inquiry demanded by CDD and U.S. Public Interest Research Group in 2006 into consolidation in the online ad business, it said. The FTC didn’t weigh the privacy consequences of Google-DoubleClick, and “the problem of profiling of Internet users will become more severe if mergers go forward without appropriate privacy safeguards,” the Electronic Privacy Information Center said.

“Despite the appearance of unlimited choice in the new media environment, people’s activities will be tracked and shaped by a very small number of companies who care far more about surveillance and targeted advertising than the public interest,” said Joseph Turow, communication professor at the University of Pennsylvania’s Annenberg school. “The federal government… has dropped the ball.”

$1 Billion in Synergies Expected

The companies’ management teams have been “engaged in conversations… off and on for the last 18 months,” Microsoft CEO Steve Ballmer told analysts in a Friday conference call. But in a written statement Yahoo stressed that Microsoft’s offer was “unsolicited,” adding that its board will evaluate the offer “carefully and promptly in the context of Yahoo’s strategic plans” and shareholder interests. A Microsoft pass at Yahoo a year ago was rebuffed. Yahoo management then said “it wasn’t really the right time to discuss an acquisition,” Ballmer said. But Yahoo is on hard times, with profits down both for the latest quarter and 2007 (WID Jan 30 p8).

The acquisition would be the biggest in Internet business history. Microsoft is offering Yahoo $31 per share, or $44.6 billion, a 62 percent premium over Yahoo’s Thursday closing share price. Yahoo shareholders would get half cash and half Microsoft shares. Microsoft has “great respect” for Yahoo, and the combination would help them become “better positioned to compete in the online services market,” Ballmer said. Ray Ozzie, chief software architect for Microsoft, said the combined company would give “new experiences to our customers that neither of us would have achieved on our own.”

Microsoft projects the online ad market to be $80 billion by 2010, nearly double today’s figure, but for the moment the market is “increasingly dominated by one player,” a reference to Google made Friday by several executives. Chief Financial Officer Chris Liddell told analysts that Microsoft expects to achieve $1 billion in synergies between the companies. Kevin Johnson, president of platform and services, said R&D capacity would grow under a deal, as their respective engineering teams work on “many of the same problems” in their search indexes and ad platforms. That in turn could improve “emerging user experiences” in video, mobile and e-commerce, he said. The companies could consolidate servers and data centers for search, ad platforms and user services, he said.

In what may have been a hint of layoffs, Johnson said the companies would ensure that “we have the right people in the right jobs and the right amount of headcount allocated to each function in the business.” A company statement, though, said Microsoft would offer “significant retention packages to Yahoo engineers, key leaders and employees across all disciplines.” Yahoo recently said it planned to lay off 1,000, following a rough year. Microsoft would follow the integration approach it used for aQuantive (WID May 21 p9), Johnson added. The company anticipates closing by the second half of 2008, if the deal is accepted by Yahoo and approved by regulators.

Yahoo Fit, Search Market Share Questioned

Analysts grilled executives on why Yahoo would fit better in Microsoft than perhaps a media buyer. “Obviously, any number of companies might have an interest” in Yahoo, Microsoft General Counsel Brad Smith said. But Microsoft already has received “unsolicited feedback” from publishers, including media companies, in favor of the acquisition, he said. Smith was the only executive to mention Google by name, saying the search giant certainly couldn’t buy Yahoo, given antitrust barriers. That was also the only antitrust reference made during the call.

The aQuantive acquisition was a “great step forward” on advertisers and publishing assets, but lacked a “consumer face,” Ballmer said. “There is no better way to increase scale and capacity” for consumers than through Yahoo. Combining ad platforms will be crucial for the companies’ use of behavioral targeting long term, he said. Ballmer scolded an analyst for asking how quickly the combined company’s operating margins would approach Microsoft’s corporate average. Every business within Microsoft has “different economic dynamics,” he said.

Johnson basically ducked a question on Yahoo’s declining search market share and what Microsoft would have to do to avoid a further fall. He highlighted the R&D synergies they expect, freeing engineers to focus on “core search relevance algorithms” and innovations in “search vertical, search user experience, and the social media aspects of search.” His description recalled Ask.com’s recent strategy for upping its search market share, which remains low. Johnson also waffled on whether the Yahoo brand, which he called “great,” would remain. Microsoft has “clear integration principles” and plans to “go through a thoughtful process” with Yahoo “to really make the specific decisions on how that lands.”