Microsoft Corp. is offering to buy search engine operator Yahoo! Inc. for $44.6-billion in cash and stock in a move to boost its competitive edge in the online services market.

Yahoo quickly running out of options

MATT HARTLEY ,  Globe and Mail Update

Yahoo Inc. might be forgiven for feeling the noose tighten around its neck as it scrambles for alternatives to a hostile takeover bid from Microsoft Corp. The troubled Internet giant's options were pared down further Monday when News Corp. chairman Rupert Murdoch said his media company – one of a handful of possible suitors – would not make a competing bid.

Microsoft CEO Steve Ballmer, meanwhile, went on the offensive, denouncing speculation about a business alliance between Yahoo and Google Inc. designed to keep Microsoft at bay.

Microsoft, the world's biggest software company, has been building its presence on the Internet but has lagged both Yahoo and industry leader Google. It is determined to get its hands on Yahoo and create a stronger competitor to Google in the online advertising business – estimated to be a $40-billion (U.S.) industry – and is pushing ahead despite the possibility of antitrust investigations in the U.S. and Europe, and the need to borrow money for the first time in its history to complete the acquisition.

News Corp. was at the top of a short list of companies rumoured to be in talks with Yahoo about a possible partnership. However, the list of other bidders willing to come to the rescue is shrinking with reports suggesting that other logical candidates, including AT&T Inc. and Comcast Corp., have no interest in trying to outbid Microsoft.

“It's largely the considered opinion on Wall Street that Yahoo will not be able to get out from under this deal and that Microsoft has bid a sufficiently high price so that there will probably be no other takers coming to the table,” said Stephen Massocca, co-CEO at Pacific Growth Equity.

On Sunday, Google's chief legal officer David Drummond lashed out at the proposed acquisition, calling it “troubling” and warning antitrust investigators that Microsoft would leverage Yahoo as a way to extend its dominance of the PC software market to the Internet, squeezing access to sites.

Monday, Mr. Ballmer dismissed that notion.

Mr. Ballmer charged that an alliance of Yahoo and Microsoft is the only way to create a true search engine competitor to Google, which controls about two-thirds of the market.

“Any alternative scenario actually doesn't seem to enhance competition, and certainly that would be the message we will communicate to regulators,” Mr. Ballmer said during an annual strategy meeting with analysts. “We trust the Yahoo board and the Yahoo shareholders will join with us quickly in deciding to move down an integrated path.”

Microsoft has faced antitrust investigations from U.S. and European regulators before, paying out hundreds of millions of dollars in settlements related to its anti-competitive behaviour. Google and Microsoft have also sparred over acquisitions, with Microsoft raising similar antitrust objections to Google's purchase of DoubleClick Inc. last summer.

“If you look at Google's action, it's classic corporate gamesmanship,” IDC Canada analyst Kevin Restivo said. “Google is trying to make this as difficult as possible for Microsoft and Google is trying to cast as much doubt over this deal ... as much as possible. Clearly with Yahoo, Microsoft is a much stronger competitor than the two apart from one another.”

Google would like nothing more than to see the deal fail, as evidenced by CEO Eric Schmidt's call to his Yahoo counterpart Jerry Yang to discuss a possible partnership after Microsoft made its bid. The Wall Street Journal reported the two companies are considering an agreement that would see Yahoo hand over its search engine business to Google. The companies did not respond to the report.

Some analysts believe such a move would raise the ire of industry watchdogs more than a Microsoft-Yahoo partnership.

“North America regulators would definitely see a Google-Yahoo merger as something that would be horrible for consumers,” Tim Hickernell, an analyst with Info-Tech Research Group, said.

“But this is going to be a huge regulatory stumbling block for Microsoft as well, because they already have a reputation, whether deserved or not, of being a monopoly in Europe and in Asia.”

Observers believe Microsoft will have to shed some Yahoo assets – including some of its international portal sites – to appease European regulators. With files from Reuters, AP

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