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Microsoft Still Waiting on Yahoo!

Microsoft Corp. still is waiting to hear from Yahoo! Inc. about its unsolicited takeover bid, announced last week.

Yahoo!s not so keen on the idea, it seems. The Internet companys CEO Jerry Yang has made no public statements, although he did send an e-mail to employees on Feb. 6.

our board is thoughtfully evaluating a wide range of potential strategic alternatives in what is a complex and evolving landscape. and weve hired top advisors to assist through the process, Yang wrote in an all-lowercase memo filed with the Securities and Exchange Commission.

Meantime, analysts seem to agree that a Microsoft-Yahoo! pairing would create a strong search engine rival to Google Inc. Google apparently sees that, too, and doesnt like it. Several media outlets, citing unnamed sources, said Google CEO Eric Schmidt this week proposed a Google-Yahoo! combination to thwart Microsofts efforts. Neither of the companies would comment.

Google did publish a statement on Feb. 3 in which it said the openness and innovation would be imperiled if Microsoft does buy Yahoo!.

While the Internet rewards competitive innovation, Microsoft has frequently sought to establish proprietary monopolies and then leverage its dominance into new, adjacent markets, wrote David Drummond, senior vice president of corporate development and chief legal officer for Google.

Indeed, a Microsoft-Yahoo! deal would face its challenges, and its rewards, analysts said.

First, the challenges. Telecom experts for investment bank Stifel Nicolaus predict an intense antitrust analysis if the combination materializes. The Department of Justice, especially, would ask whether the deal removes constraints on the ability of Microsoft and Yahoo! to act in an anticompetitive manner and whether the transaction improves or intensifies competition with the market, they wrote in a Feb. 1 note to clients.

Because of that possible level of inquiry, the Competitive Enterprise Institute (CEI), a D.C.-based think tank, is calling on the Federal Trade Commission to keep [its] mitts off a Microsoft-Yahoo! deal.

The FTC approval must make a decision based on competition, which this deal increases significantly, said Cord Blomquist, a technology policy analyst for CEI, in a prepared statement on Feb. 1.

If the combo goes through, the rewards could be huge. Boston-based ATLANTIC-ACM said Yahoo! stands to dive deeper into the applications market while Microsoft gains another avenue into the Web, wrote analyst Aaron Blazer in a Feb. 7 research note.

Increased Internet ad revenues and more eyeballs will improve the business model for the rollout of Microsofts much-anticipated software-as-a-service offering, Blazer added. Microsoft has more applications than Google but it also needs to make money beyond licensing its software, Blazer wrote.

Yahoo, and the power of its portal and advertising business, brings both a platform and more importantly, a formula for generating Web ad revenues, which, up to this point, have eluded Microsoft, he said.

Analysts for research firm Ovum agreed, but added that Microsoft would give Yahoo! some much-needed muscle as well.

The addition of Microsofts engineering capability into Yahoo should allow the combined entity to bring new products and services to market more quickly, something that Yahoo has notably struggled with, said David Mitchell, senior vice president of IT research for Ovum.

Theres also been a lot of talk about Microsoft and Yahoo! bringing new applications to mobile phones.

So the question comes down to whether Yahoo! accepts Microsofts unsought bid, or whether it teams with Google or does nothing at all. And with reports that its investors are growing ever more impatient, Yahoo! had better do something soon. The San Jose Mercury News reported on Wednesday that a group of shareholders is suing Yang and Yahoo!s board for failing to negotiate with Microsoft or otherwise give good-faith consideration to its offers.

The shareholders were referring to overtures Microsoft made to Yahoo! last year about teaming. Theyre unhappy that Yang apparently hasnt worked harder to land a better offer or improve Yahoo!s performance. To be sure, Yahoo! claims just 22.9 percent of searches in the United States, compared to Googles 58.4 percent, according to data from comScore Inc. Worldwide, that disparity grows, giving Google 62.4 percent market share and Yahoo! just 12.8 percent, said comScore, a firm that tracks how the Internet is used.

ATLANTIC-ACM www.atlantic-acm.com
CEI www.cei.org
comScore Inc. www.comscore.com
Google Inc. wwww.google.com
Microsoft Corp. www.microsoft.com
Ovum www.ovum.com
Stifel Nicolaus www.stifel.com
Yahoo! Inc. www.yahoo.com


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