Ex-antitrust chief: Yahoo/Microsoft deal hard call

WASHINGTON (Reuters) - Any deal between Yahoo Inc YHOO.O and Microsoft Corp MSFT.O would face a tough antitrust probe, the former head of the Justice Department's antitrust division said on Wednesday.

The headquarters of Yahoo Inc. is pictured in Sunnyvale, California, May 5, 2008. REUTERS/Robert Galbraith

Since Google Inc's GOOG.O deal with Yahoo fell apart under antitrust scrutiny last year, there has been persistent talk that Yahoo, the No. 2 search engine, would resume discussions with Microsoft, a distant No. 3.

Thomas Barnett, who led the investigation of Google’s scrapped deal with Yahoo when he headed the Justice Department’s antitrust division, said tying the lucrative search divisions of Yahoo with Microsoft could be a tough call for regulators.

“Any ‘three to two merger’ to my mind would require a significant investigation,” said Barnett, who stepped down in November after three years as head of the division.

A three to two merger is one where there are three competitors in a market and a merger reduces that to two.

Yahoo chief Carol Bartz, who replaced co-founder Jerry Yang in January, said recently she did not join Yahoo to sell the company, but that “everything is on the table.” Microsoft has said it no longer wants all of its rival, but would still pursue a search engine only deal.

If the deal was broader than just search, antitrust regulators, who are expected to be led by Christine Varney once she is confirmed, could look at other areas of business overlap, such as instant messaging and e-mail.

“Whether that would present a problem would require an investigation,” Barnett told Reuters.

AOL leads instant messaging with Microsoft in second and Yahoo in third place, according to data from Nielsen Online. In the e-mail market, Yahoo and Microsoft are the industry leaders with Google’s gmail in third place.

Yahoo, which leads the market for online display advertising, has been under pressure for nearly a year as it held fruitless merger or partnership talks with Microsoft, Google and Time Warner Inc's TWX.N AOL.

During that time, Yahoo lost market share in search advertising, while display ad sales have been badly hit industrywide by the U.S. recession.

Another factor is the widespread expectation antitrust enforcement will be tougher under President Barack Obama’s antitrust team.

“I think all merging parties are going to have a much more difficult time getting their mergers through,” said Steve Newborn, an antitrust lawyer with Weil Gotshal and Manges LLP. “I think the Obama DOJ (Justice Department) is going to be much more enforcement minded than the Bush administration DOJ.”

Editing by Andre Grenon