EU is scrutinizing Yahoo-Google deal

Times Staff Writers

Roadblocks are mounting on a vital route for Yahoo Inc.'s revival: the company’s advertising partnership with once-rival Google Inc.

The European Union said Monday that it was reviewing the deal for antitrust implications there, adding to recent public criticism from major U.S. advertisers and a worldwide association of newspapers.

In addition, the U.S. Justice Department is considering a formal challenge to the partnership, through which Google would broker some text ads for Yahoo’s search engine. And attorneys general in at least 11 states, including California, are running investigations to determine whether the deal would hurt competition.

Yahoo has the most to lose financially if the deal is delayed or scuttled. The Sunnyvale, Calif., Internet company struck the deal as an alternative to Microsoft Corp.'s hostile takeover bid, saying the Google deal could help Yahoo remain independent while boosting its cash flow.


But the growing opposition to the deal also might be opening up some potholes for Google. By extending a lifeline to Yahoo with the advertising partnership, Mountain View, Calif.-based Google stepped up scrutiny of its own growing dominance in online advertising, said Jeffrey Lindsay, an analyst at Sanford C. Bernstein & Co.

“It puts Google firmly on the radar screen of regulators,” he said.

Yahoo’s stock, which closed down 23 cents at $18.85 a share, has lost about a quarter of its value since Microsoft withdrew its acquisition bid in May.

If the advertising deal falls through, Yahoo’s stock almost certainly would tumble further because investors are counting on the $250 million to $450 million in increased operating cash flow that Yahoo said the deal would generate in the first year.

“Less cash in Yahoo’s pocket means less opportunity to reinvent itself and regain its relevancy,” said Colin Gillis, an analyst at Canaccord Adams Inc.

A steep stock drop also would make Yahoo more vulnerable to another takeover attempt by Microsoft or another company.

For its part, Google will earn a commission for every ad it brokers on Yahoo’s network of websites. But many analysts say Google also had another motivation for the partnership: helping Yahoo stay out of Microsoft’s hands.

The two companies announced the deal in June after merger talks between Microsoft and Yahoo collapsed. Google and Yahoo said they would postpone working together until October so that antitrust officials could scrutinize the partnership.

The company had hoped to avoid a European review by limiting the ad deal to the United States and Canada, where antitrust regulators are less aggressive. But since the two companies do business in Europe, the cooperation could violate European Commission rules on anti-competitive practices, such as price-fixing and sharing of sensitive business information, said Jonathan Todd, a spokesman for the EU’s competition commission.

He said the review, which began quietly in July, would focus on the possible effects of the deal on European Commission rules relating to restrictive business practices.

If the commission escalates the inquiry to a formal investigation, it could pose major problems for Google and Yahoo. European regulators have been more aggressive than U.S. officials about enforcing antitrust regulations in recent years.

Although European websites are not part of the deal, the review is not surprising, said Juan Delgado, a research fellow at Bruegel, a think tank in Brussels, and a former economist with the competition commission.

“It’s not the same as if this happened with two shoe manufacturers,” he said. “In this case, you’re talking about advertising on the Internet, and it’s difficult to assess who’s going to be affected.”

Google spokesman Adam Kovacevich said the company was cooperating with European regulators.

“The agreement is limited in scope to Yahoo’s U.S. and Canadian websites, and it will not have any significant effect on Europe,” he said.

Hilary Schneider, who runs Yahoo’s U.S. operations, said last week that her company remained committed to an advertising partnership with Google. She said she was confident that regulators would be comfortable with the partnership and that Yahoo planned to move forward next month even if the review wasn’t finished.

Microsoft argues that the deal would give Google too much control over the online advertising market.

Bernstein’s Lindsay said Yahoo and Google were too optimistic that the ad deal would get regulatory approval. Given recent developments, he said he now expected, at a minimum, a “significant delay.”



Puzzanghera reported from Washington, Guynn from San Francisco.