Doubts rise on Google-Yahoo tie-up

[dhilipkumar]

THE likelihood that Google and Yahoo will walk away from their planned search partnership has risen, say people familiar with the matter.

The two internet companies have so far failed to reach an agreement on their partnership with the Justice Department, which has been building a lawsuit to block the deal. Following a meeting with the Justice Department, the companies could announce a decision to back away from the partnership -- or a last-minute resolution, if one is reached -- by the middle of next week, according to these sources.

Google spokesman Adam Kovacevich said the company continues to have "co-operative discussions with the Department of Justice about this arrangement".

"We are confident that the arrangement is beneficial to competition, but we are not going to discuss the details of the process," he said.

A Yahoo spokeswoman Tracy Schmaler said discussions with the Justice Department are "ongoing," adding, "we believe strongly that this agreement will strengthen Yahoo's competitive position in online advertising and will help to drive a more robust, higher quality Yahoo marketplace for our advertisers, publishers and users".

Talks about a possible settlement have been going on for weeks and an agreement could yet be struck under which regulators would sanction the deal. The partnership, which was struck in June, allows Yahoo to show search ads sold by Google and take a cut of the revenue. The deal has faced criticism that it would give Google too much clout in the online advertising space.

The option to scrap the deal has been on the table before, but Google in particular has begun considering it more seriously recently as talks with the Justice Department haven't progressed. One sticking point has been the Justice Department's discussion of having the companies sign a consent decree enforcing the terms of the search partnership. By doing so, the parties would be subjecting their compliance with the agreement to ongoing oversight by a judge.

A withdrawal would be a big blow for the internet companies. When the deal was announced in June, Yahoo rejected a separate search offer from Microsoft. At the time, both sides said they would voluntarily delay implementing the partnership to allow regulatory review. The companies later said they would implement the deal around early October regardless of whether regulators had weighed in, though they haven't gone ahead with the partnership even though that deadline passed.

The deal, which Yahoo hopes would help it generate hundreds of millions of dollars in additional revenue, instantly drew criticism from advertisers and competitors. The Justice Department has intensified its review, hiring veteran litigator and former Walt Disney vice chairman Sanford Litvack to review evidence and build a case if a decision is made to challenge the deal. Both sides agreed to extend their delay a few weeks ago and entered into talks about revising the deal altogether.

By dropping out, Google would likely be seeking to avoid a protracted legal battle that would place its market power in the public spotlight for months. Backing out of the deal would also clear a path for Yahoo to pursue other possible combinations to help turn around its business.

Yahoo is already in talks about combining with Time Warner's AOL. Both sides have dallied over consummating that deal. While talks could proceed faster once the outcome of the Google-Yahoo search deal has been resolved, whether AOL and Yahoo can still reach an agreement on matters such as price and who would lead the combined company remains unclear.

Yahoo board member Carl Icahn also remains a strong proponent of Yahoo selling its search business to Microsoft, although there aren't any formal talks between the two companies.