Report: Justice Dept. signals challenge to Google-Yahoo deal to ward off Microsoft

SAN FRANCISCO — Yahoo's plans to boost its profits in an online advertising partnership with rival Google could be moving into the crosshairs of the U.S. Justice Department, which has hired an antitrust litigator to review evidence for a possible legal challenge to the deal.

The Wall Street Journal reported today that the attorney is Sanford Litvack, a former vice chairman at Walt Disney Co. and chief of the Justice Department's antitrust division during the Carter administration.

Litvack is reviewing evidence the department has gathered in what could become an antitrust case focused either on Google itself or on the search-advertising partnership it announced with Yahoo in June, the Journal reported. That deal was part of Yahoo's attempt to ward off a takeover attempt by Microsoft.

A Justice Department spokeswoman declined to comment.

But Yahoo said in a statement, "We have been informed that the Justice Department, as they sometimes do, is seeking advice from an outside consultant, but that we should read nothing into that fact. We remain confident that the deal is lawful."

Google executives also have repeatedly predicted the partnership will clear all regulatory hurdles. Chief Executive Eric Schmidt even went so far as to recently declare that Google intended to pursue the Yahoo partnership next month, even though the Justice Department hadn't completed its review.

But Internet industry consultant Scott Cleland of Precursor said Litvack's hiring, coupled with opposition from a group of major advertisers, doesn't bode well for the deal. "This is turning into a very serious investigation," Cleland said. "Google and Yahoo have a steep hill to climb."

Blair Levin, a regulatory analyst at Stifel Nicolaus, said in a note to clients that the hiring of an outside lawyer such as Litvack is a "rare" move by the department that likely indicates a legal challenge against a company or transaction.

"The stakes are ... far higher for Yahoo," Levin wrote, because Google has "already succeeded in keeping Yahoo out of the arms of Microsoft."

Before embracing the Google deal, Yahoo rejected Microsoft's $47.5 billion takeover offer — a decision now haunting Yahoo's board, with the company's stock price nearly 50 percent below Microsoft's last offer of $33 a share.

Yahoo shares fell 68 cents today to close at $17.58 while Google shares shed $1.29 to $418.66.

If regulators challenge the Google partnership, it would give Yahoo's already testy shareholders another compelling reason to question the judgment of the company's leadership, said Standard & Poor's analyst Scott Kessler.

"Yahoo is in a perilous position right now," Kessler said. "They walked away from a variety of different deals to work with Google. One could argue that was a colossal mistake."

After withdrawing its takeover bid, Microsoft tried to buy Yahoo's online search engine in a complex deal that could have paid out more than $30 billion over the next decade.

Yahoo is instead counting on Google's superior technology for identifying moneymaking ads to boost its annual revenue by about $800 million.

Because they aren't swapping stock or cash, Google and Yahoo could have launched their advertising partnership shortly after it was announced in mid-June. Realizing the Justice Department would have antitrust concerns, the two companies voluntarily agreed to postpone the partnership's starting date until October, to give regulators time to examine the ramifications.

"It reflected a desire by the companies not to thumb their noses at the government," said Howard Morse, an antitrust lawyer who formerly worked for the Federal Trade Commission's Bureau of Competition.

Should regulators raise a red flag, the government could either try to negotiate revisions to the partnership with the two companies or sue to block the deal. A lawsuit probably also would seek a temporary restraining order to prevent the companies from working together until a trial takes place.

The partnership between the two companies would allow Google to sell some of the ads displayed alongside search results on Yahoo's Web site. Insisting the deal would benefit consumers and advertisers, Google and Yahoo have been planning to start the partnership in time to take advantage of the marketing blitz that occurs in the months leading up to the holiday shopping season.

But a regulatory challenge could delay the advertising partnership well into next year. Google had to wait 11 months before getting the government's green light to complete its $3.2 billion acquisition of online ad service DoubleClick this year.

Combined, Google and Yahoo control more than 80 percent of the U.S. search advertising market — a concentration that makes their partnership "a hard sell," Kessler said.

"It's a difficult argument to make that this business agreement will promote greater choice, greater competition and a healthier advertising environment," Kessler said.

Indeed, several major advertisers said Sunday they had written the Justice Department in opposition to the deal. The group includes Coca-Cola, Procter & Gamble and General Motors.

But if regulators blocked the Google deal, it still could have the perverse effect of diminishing competition by depriving Yahoo of an opportunity to make more money than it could invest in its own technology, said Outsell analyst Ned May.

A spokesman for Microsoft, which has strongly opposed the deal in testimony before Congress, declined to comment.

Associated Press reporter Joelle Tessler contributed to this story.