Would the FTC Block a Google/Yahoo Deal?

Includes: AABA, GOOG, MSFT
by: Eric Savitz

One of the issues which Microsoft’s (NASDAQ:MSFT) proposed bid for Yahoo (YHOO) faces is a rigorous regulatory review in both the U.S. and Europe. The general consensus on the Street has been that the deal won’t have any trouble passing muster on search, given Google’s commanding share of the market. But there could be scrutiny of other aspects of their combined businesses, in particular Web based-email and instant messaging.

Meanwhile, investors may be overlooking the potential regulatory scrutiny Yahoo would get from an oft-cited rescue strategy: outsourcing search to Google (NASDAQ:GOOG). In a research note this morning, UBS analyst Heather Bellini summarizes a conference call she hosted yesterday with Glenn Manishin, a litigation attorney and partner and the law firm Duane Morris.

Manishin notes that the Federal Trade Commission has the authority to review any agreement, even if it does not involve M&A. And his view, according to Bellini, is that “such a deal probably would not be approved because of Google’s existing very significant search share.” She writes that Manishin believes “an agreement between Yahoo and Google would be much more problematic than a deal between Yahoo and Microsoft.”

As for the likely regulatory reaction to a deal between Microsoft and Yahoo, Manishin expects a complex process which could drag into early 2009. As Bellini notes, Manishin thinks any objects to concentration the deal creates in mail, instant messaging or another secondary areas could likely be addressed by divesting or spinning-off pieces of the combined company to satisfy regulator concerns.

Yahoo today is up 16 cents at $28.73.

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