Microsoft's antitrust problem

A $41 billion marriage of Microsoft and Yahoo would create a powerhouse with dominance in e-mail and instant messaging and an opportunity to link those online features into the Windows operating system.

And that could pose problems for a deal.

The strength of Microsoft (MSFT) and Yahoo (YHOO) together could prompt regulators in the U.S. and elsewhere to slow down a purchase by imposing restrictions, even forcing Microsoft to spin off pieces of Yahoo. Google’s (GOOG) top lawyer, senior vice president David Drummond, on Sunday alleged that buying Yahoo could present new opportunities for Microsoft to abuse its operating system power and quash innovation on the Internet. And two Congressional committees have already promised to hold hearings on the subject.

While few antitrust experts have said they expect those concerns would derail an acquisition, they could mean regulators would take their time mulling a merger –- making the process more time-consuming and expensive than Microsoft might like.

“Everybody immediately focuses on search, but there are a million things that Yahoo and Microsoft overlap in,” said Mark Ostrau, an attorney with the Silicon Valley law firm of Fenwick & West who specializes in high-tech acquisitions. “Each of those is going to have to be sorted through independently by the various antitrust agencies that are going to look at this.”

That’s assuming, of course, that Microsoft succeeds in bringing Yahoo to heel. Though Microsoft has urged Yahoo to quickly embrace its offer, Yahoo’s board so far has reacted coolly, saying it will take plenty of time to consider its options.

A likely reason for Yahoo’s resistance? Yahoo co-founder and CEO Jerry Yang can’t stand Microsoft or the thought of turning over his creation to the software giant. One Silicon Valley insider who knows Yang said that when Gates approached him more than a year ago about a relationship, Yang recoiled. Whether a relationship between the two companies is good for competition or not, this insider said, getting swallowed by Microsoft is “Jerry’s worst nightmare.”

On the ground in Silicon Valley, the tech community isn’t giving much thought to the antitrust issue. In contrast to a decade ago when Microsoft used its monopoly power in operating systems to strong-arm Valley companies, today Google is such a dominant force in Internet advertising and services that Microsoft doesn’t appear to be a bully. Instead, Microsoft these days looks instead like just another tech rival trying to blunt Google’s incredible momentum.

“The Yahoo bid seems like an act of real extreme measures by Microsoft,” said Matt Rosoff, lead analyst at Directions on Microsoft, an independent firm that tracks the company. "They’ve never tried to do a hostile acquisition before, they’ve never spent anywhere close to this on an acquisition.”

But there are substantial legal issues that could complicate Microsoft’s bid for Yahoo. Randal C. Picker, an antitrust law professor at the University of Chicago, said regulators have a standard procedure that test whether an acquisition passes antitrust muster. Under the formula, which takes into account how big a chunk of the market each company has, a Microsoft-Yahoo tie-up would probably raise red flags.

“My guess is that if you ran traditional antitrust numbers and looked at market overlap between Microsoft and Yahoo, we’d find any number of markets where on traditional antitrust measures this merger would be a no-go,” Picker said.

But this isn’t a traditional situation, so Microsoft would probably get the go-ahead, he noted. “I think most observers would say that the dynamic energy is clearly with Google.”

European regulators, who have taken a tough stance with Microsoft lately, could be especially difficult to convince that the merits of this acquisition justify eliminating a competitor from the marketplace. In the past, Picker said, they have been wary of “conglomerate” mergers – for example, in 2001, the European Union blocked GE’s bid to buy Honeywell even though U.S. regulators blessed it quickly. “The EU has clearly exhibited a clear, continuing concern about Microsoft,” Picker said.

And there are details of a Microsoft/Yahoo combo that are ikely to make even U.S. regulators uncomfortable. In the realms of e-mail and instant messaging for example, a combination of Hotmail, Yahoo Mail, Windows Live Messenger and Yahoo Messenger would consolidate so much power in one company that regulators might balk.

To avoid that scenario, regulators could conceivably force Microsoft to spin off all or part of those properties.