Google has raised serious objections to Microsoft's $44.6bn bid to acquire Yahoo!, saying it could allow the software giant to extend its dominance over the desktop onto the internet, although others are not so sure.
The move by Google is being seen partly as tit for tat after Microsoft raised objections of its own over Google's bid to buy online advertising giant DoubleClick.
That merger is under investigation by the EU, while a possible combination of Microsoft and Yahoo! certainly raises serious questions for competition authorities.
However, Google's objections are grounded at least in part in its desire to protect its own dominance of search and online advertising. It is the clear leader in the search market with Yahoo! a distant second and Microsoft in third place.
Its ability to maintain that dominance is key to its future strategy, which has Microsoft clearly in its sights both online and on the desktop. Google is keen to eat away at Microsoft's healthy revenues for its Office based products, such as Word and Excel, with its rival online tools known as Google Documents.
David Drummond, a Google senior vice-president and its chief legal officer, said that the merger of Microsoft and Yahoo! could undermine competition on the web and called on policy makers to challenge any deal.
Drummond said: "Could a combination of the two take advantage of a PC software monopoly to unfairly limit the ability of consumers to freely access competitors' email, IM, and Web-based services?"
Microsoft, however, argues that the deal it proposes can only improve competition by creating a "compelling number two competitor for Internet search and online advertising" to leader Google.
"The alternative scenarios only lead to less competition on the Internet," Microsoft general counsel Brad Smith said in a statement.
Microsoft could well have support here. Contrary to Google's objections, some analysts argue that a tie-up between Microsoft and Yahoo! could be good for competition.
David Mitchell, senior vice-president, IT research, at Ovum, said: "The combined Microsoft and Yahoo! business is still likely to be a much smaller player than Google, although they will have substantially improved their ability to compete."
The idea of creating a stronger second player in the market could be one that regulatory bodies in the US and EU might find appealing when it comes to considering whether to green light the deal or not.
According to Dr. Hans Friederiszick, managing director of the European School of Management and Technology Competition Analysis: "Whilst the search-engine marketplace is highly concentrated, the authorities could take the view that the proposed merger would in fact be pro-competitive by creating an organisation with the strength and clout to vie more effectively with Google for market space."
While these issues are considered there is still a good chance that Microsoft's unsolicited bid might not happen.
In another twist it has emerged that Yahoo! and Google have been holding talks of their own. The two were in discussions last year, which came to nothing, but even before Microsoft declared its intentions toward Yahoo!, the two search engines have been talking again about a possible alliance as one way to derail the Microsoft bid.
It is highly unlikely that Google will bid for Yahoo! as it would not win regulatory approval. It would be seen as far too dominant online and dramatically reducing competition.
In a memo to Yahoo! staff on Friday, obtained by Reuters on Sunday, Yahoo! executives wrote: "We want to emphasize that absolutely no decisions have been made -- and, despite what some people have tried to suggest, there's certainly no integration process underway."
The Wall Street Journal reported yesterday that Google's chief executive Eric Schmidt called Yahoo!'s chief executive Jerry Yang to offer his company's help in any effort to thwart Microsoft's bid.
Whatever Yahoo! does it has to do something. The company is in trouble following a string of poor results and last week's decision to cut 1,000 staff. It has also struggled to bring new products and services to market, dampening further its ability to compete with Google.
Separately, News Corporation has rules itself out of any bid for Yahoo!. News Corp CEO and chairman Rupert Murdoch had initial talks last year about a possible combination of its social networking site MySpace with Yahoo!, but these came to nothing after Terry Semel stepped down as Yahoo CEO to be replaced by Yang.
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