Microsoft cites Yang comments on Google-Yahoo deal

Testifying at a congressional hearing, Microsoft General Counsel Brad Smith said that in a June 8 meeting in San Jose Yahoo chief Jerry Yang described Internet search as a "bipolar" market, with Google on one side and Yahoo and Microsoft on the other.

"(Yang) said 'If we do this deal with Google, Yahoo will become part of Google's pole and Microsoft,' he said, 'would not be strong enough in this market to remain a pole of its own,'" Smith told the Senate Judiciary Committee's antitrust subcommittee on Tuesday.

He said Microsoft executives met later in a separate conference room. "We sat down and we said, 'We can't believe that Jerry just said those things.'"

Smith used the anecdote to bolster Microsoft's contention that the Google-Yahoo deal would violate antitrust law.

"That's pretty explosive stuff and we'll have to consider that," agreed the antitrust subcommittee's chairman, Democratic Sen. Herb Kohl of Wisconsin.

Yahoo General Counsel Michael Callahan, also testifying at Tuesday's hearing, said he had been at the June 8 meeting but he disputed Smith's description of what Yang had said.

"I disagree with how Mr. Smith characterized what Mr. Yang thinks about the market," said Callahan. "Our board of directors made a conscious decision to stay in search."

Kohl shot back: "Clearly what you said contradicts what your boss said."

Google, with more than 60 percent of the Web search market, and Yahoo, with 16.6 percent, announced a deal on June 12 that would allow Yahoo to place Google advertisements on its site and collect the revenue. It has raised antitrust concerns because of their dominance of the market.

The Yahoo-Google partnership was widely seen as an effort by Yahoo to fend off Microsoft's on-again, off-again efforts to buy all or part of Yahoo.

Google and Yahoo have refrained from consummating the deal while they wait for an opinion from antitrust authorities at the Justice Department. Several state attorneys general were also looking into the arrangement.

Callahan accused Microsoft of teaming up with investor Carl Icahn to force down Yahoo's price.

"Microsoft ... has turned to activist shareholder Carl Icahn, in the apparent hope that this will force a fire sale of Yahoo's core strategic search business," he said.

Icahn is leading a proxy campaign to dump Yahoo's current management and board at the August shareholder meeting.

Microsoft's most recent offer to acquire Yahoo's search business was rejected Saturday evening by Yahoo, which said it was open to a full-scale merger with Microsoft if it offered at least $33 a share, or $47.5 billion.

Microsoft had offered $31-per-share cash on January 31, when it tendered its first offer, and then raised it to $33 per share. Yahoo rejected it, demanding at least $37 a share, and Microsoft pulled the offer.

Yahoo closed down 4.56 percent at $21.54 on Tuesday on the Nasdaq. Microsoft shares were up 3.98 percent to $26.15, and Google shares slipped 1.06 percent to $516.09.

Google's Chief Legal Officer David Drummond also defended the partnership with Yahoo and dismissed the idea that it would hurt competition in the Internet search market.

"Google and Yahoo will remain fierce competitors," Drummond said. "This agreement will not remove a competitor from the field."

Drummond argued that any Microsoft deal with Yahoo would raise antitrust issues in the markets for display advertising, e-mail and instant messaging.

"The most energetic critic of ours is Microsoft," he said, adding that it was "not exactly a mom-and-pop show."

(Editing by Tim Dobbyn, Derek Caney, Phil Berlowitz)