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Microsoft, Yahoo! Await Antitrust Scrutiny

The proposed merger could be drawn out because of its complexity.

SAN FRANCISCO --

Microsoft

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says it doesn't expect any regulatory roadblocks to prevent it from swallowing

Yahoo!

(YHOO)

.

But some legal experts predict the proposed merger might not be the cakewalk Microsoft expects.

At the very least, the $45 billion deal's massive size, its complexity and its impact on various markets mean it is not likely to get a rubber stamp from government regulators.

"As a rule of thumb, a merger that reduces the number of players from 3 to 2 is going to get challenged unless there's some good reason for why it helps competition," says one antitrust attorney, speaking anonymously because he wasn't sure if his firm represents any of the companies.

Microsoft's good reason comes down to one word:

Google

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. The online search advertising market is so dominated by Google, that Microsoft says joining forces may be the only way to increase competition in such an important market.

And Microsoft won't have any trouble finding statistical data to make its case.

According to Nielsen Online, Google garnered 56.3% of all online searches in the month of December. By contrast, Yahoo! and Microsoft's MSN network, attracted 17.7% and 13.8% of searches in December, respectively.

"The industry will be well served by having more than one strong player, offering more value and real choice to advertisers, publishers and consumers," said Microsoft Platform and Service Division President Kevin Johnson in a statement announcing the merger proposal.

Nonetheless, a move from three players to two will result in more market concentration, and that can raise flags with regulators.

Oracle's

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bid to acquire

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Peoplesoft

represented another such 3-to-2 deal, and met fierce resistance from the government. The deal was eventually approved after the government lost in court.

And the Federal Trade Commission sought to block

Whole Foods Market's

(WFMI)

bid to acquire Whole Oats, where market concentration is even less, say some attorneys.

Howard Shelansky, a professor at the University of California Berkeley School of Law, says that regardless of whether the Microsoft-Yahoo deal is ultimately approved, the deal's size and complexity means it will likely prompt regulators to extend the initial 30-day review period for an additional six months, in what is known as a second request for information.

"These firms are both major players, and there's certainly some horizontal overlap," says Shelansky.

Besides each Web site's search service, the companies also provide competing services like email and instant messaging.

"There are many other markets involved here," says Shelanski, and each market needs to be evaluated on its own merits.

Which government agency ultimately reviews the proposed merger is still unclear. The Department of Justice and the FTC typically don't determine who will review a merger until after the deal has been approved by both companies and a pre-merger notification is filed.

Should the FTC get the case, some legal experts say the merger could also face a slew of non-economic hurdles, particularly concerns about consumer privacy.

While the Department of Justice is limited to a narrow set of economic standards when evaluating a merger, the FTC's statute gives it more leeway, particularly in terms of consumer protection and prohibiting unfair and deceptive methods of competition.

Indeed, FTC commissioner Pamela Jones Harbour raised privacy concerns in objecting to Google's $3.1 billion merger of Doubleclick last year.

Jones Harbour was outvoted on that case. But the power and philosophy at the FTC could change with a new administration in 2009.

That makes Microsoft's determination to close the deal in the second half of 2008 all the more critical.

In the Bush administration, Microsoft has benefited from a friendly regulatory regime. In 2001, the Bush Department of Justice settled its long-running antitrust case against Microsoft, in what some critics said amounted to a slap on the wrist. Nine states went on to sue Microsoft on their own, seeking stiffer penalties, in the wake of the DOJ settlement.

Under a new administration, be it Democratic or Republican, the deal could receive even more scrutiny than is already expected.

Of course, the real action might take place overseas. The European Union's antitrust watchdog, the European Commission, is considered to take a tougher line in evaluating market competition. Last year, the EC ruled that Microsoft needs to make certain aspects of intellectual property available to other companies.

"The European antitrust regulators are likely to give it closer scrutiny and perhaps longer scrutiny," says Roxanne Polidora, the head of the antitrust practice at the law firm Pillsbury Winthrop Shaw Pittman. "

Ultimately however, Polidora doesn't expect the deal to be blocked.

"Nobody can predict what they're ultimately going to do, but the general view of antitrust practitioners is that ultimately it will probably pass muster even with European regulators."