[Infowarrior] - Google Drops Yahoo Deal

[Richard Forno]

Google Drops Yahoo Deal After Government Talks Fail (Update1)

http://www.bloomberg.com/apps/news?pid=20601087&sid=a0zecDnA9Qhw&refer=home

By Crayton Harrison

Nov. 5 (Bloomberg) -- Google Inc., the top seller of online  
advertising, scrapped an agreement to place ads on Yahoo! Inc.'s site  
after failing to win support from the U.S. government.

Regulators and advertisers' concerns about the deal may have hurt  
Google's long-term interests, David Drummond, the company's chief  
legal officer, said today in a blog post. Microsoft Corp., which  
trails Google and Yahoo in online ads, also had criticized the  
agreement, saying it would give Google too much power.

The action is the first significant time that Google has backed away  
from an attempt to expand its reach, said Rebecca Arbogast, an analyst  
at Stifel Nicolaus & Co. in Washington. While abandoning the deal  
helps Google avoid a confrontation with the government, concerns that  
it has become too strong won't disappear, she said.

``It creates a bit of a cloud around them, in terms of raising a  
question of, have they gotten as big as they could get?'' she said.  
``What they avoid by walking away from this is any adverse legal  
precedent at all. They will be completely unsullied.''

The Mountain View, California-based company fielded about two-thirds  
of U.S. searches last year, three times the amount of second-place  
Yahoo. The U.S. online ad market is expected to rise 17 percent to  
$26.2 billion this year, according to EMarketer Inc.

Google fell $5.46, or 1.5 percent, to $361.48 at 10:22 a.m. in Nasdaq  
Stock Market trading. Sunnyvale, California-based Yahoo climbed 81  
cents, or 6.1 percent, to $14.16.

Yahoo's Options

The decision leaves Yahoo, which turned down takeover offers of as  
much as $47.5 billion from Microsoft this year, without a new source  
of ad sales. Yahoo estimated that the deal would generate as much as  
$800 million a year in revenue.

Google's share of online searches has helped it command higher prices  
and draw a wider variety of advertisers, Yahoo has said. Chief  
Executive Officer Jerry Yang aimed to use Google ads for so-called  
keyword searches.

The companies announced their agreement after Yahoo rejected attempts  
by Microsoft to buy the company, or at least its online search  
business. Microsoft, which accounted for 8.5 percent of online queries  
in September, wanted to use Yahoo to help catch up with Google.

Antitrust Questions

The Justice Department hired attorney Sanford Litvack as an adviser in  
September, signaling that the government was looking into an antitrust  
challenge. Litvack, the department's antitrust chief under President  
Jimmy Carter, headed a 2006 commission created by Congress to consider  
changes to antitrust law.

The Association of National Advertisers, a trade group, opposed the  
Google-Yahoo deal, saying it would push ad prices higher. The American  
Antitrust Institute, a Washington advocacy group, called for  
restrictions to limit Google's control of the market.

On Sept. 29, a group of U.S. lawmakers from California urged the  
government not to block the deal, saying Google wouldn't gain power  
because the agreement wasn't a merger.

With profits falling and revenue growth stalling, it may be too late  
now for Yang, 39, to seek another offer from Microsoft, Arbogast said.  
While Microsoft CEO Steve Ballmer has suggested that a deal with Yahoo  
might still make economic sense, the company said Oct. 16 it has no  
interest in an acquisition.

Yahoo's profit has dropped in 10 of the past 11 quarters, and net  
sales growth slowed to 3 percent last quarter, down from 14 percent a  
year earlier. In August, investors withheld about a third of their  
votes for Yang's re-election to the board in a demonstration of their  
displeasure.

Yahoo has also talked with Time Warner Inc. since April about an  
acquisition of that company's AOL business. Yahoo executives said on  
an Oct. 21 conference call that they were socking cash as they weighed  
their options.

To contact the reporter on this story: Crayton Harrison in Dallas at tharrison5 at bloomberg.net 
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Last Updated: November 5, 2008 10:25 EST