All Things Digital

Can a search-advertising alliance between Yahoo and Google possibly pass regulatory muster? We may soon find out.

Now that investor-tormentor Carl Icahn has filed a proxy slate to unseat Yahoo’s board with the intent, one way or another, to push the company back into merger negotiations with Microsoft (MSFT), an obviously panicked Yahoo (YHOO) is scrambling to pull together a search-ad deal with Google (GOOG).

The possibility of a search-ad outsourcing arrangement between the two companies was, in part, what caused Microsoft to lose its appetite for Yahoo. Could it cause Icahn to lose his as well? Seems doubtful. Even if, as sources close to the situation tell the New York Post, the deal is the sort of open-to-all-comers arrangement Yahoo and Google hope would pass regulatory scrutiny. Under its terms, a real-time auction system would be used to select the most lucrative ads for a given search query from among those sold by Yahoo, Google or anyone else that cares to participate. Structured in this way, the deal might not, as Microsoft has claimed in the past, consolidate over 90% of the search-advertising market in Google’s hands and draw the ire of antitrust regulators.

Instead it might consolidate, oh say … 89.99% in the search sovereign’s hands. Said Kevin Lee, chairman of search engine marketing firm Did-It, “Given the way the ecosystem is put together now, Google would probably be the winner in a vast majority of cases.”

Looks like Yahoo’s (YHOO) boardroom blitz is on. Billionaire investor Carl Icahn has decided to move forward with a proxy fight to oust Yahoo’s entire board in favor of one more amenable to merger negotiations with Microsoft (MSFT).

“It is unconscionable that you have not allowed your shareholders to choose to accept an offer that represented a 72% premium over Yahoo’s closing price of $19.18 on the day before the initial Microsoft offer,” Icahn wrote in a letter to Yahoo’s leadership. “I and many of your shareholders strongly believe that a combination between Yahoo and Microsoft would form a dynamic company and more importantly would be a force strong enough to compete with Google on the Internet.”

So strongly, in fact, that Icahn–who owns 59 million Yahoo shares–has asked the Federal Trade Commission for permission to buy as much as $2.5 billion more of the company’s stock and has assembled a 10-member alternative board slate. Among the directors nominated, Icahn himself, his lieutenant Keith Meister, former Viacom Inc. (VIA) Chief Executive Frank J. Biondi Jr., and Dallas Mavericks owner Mark Cuban (Mark Cuban?!?).

And lest there be any doubt that Icahn was gunning for anything less than a referendum on Microsoft’s takeover offer, the financier concluded his letter with a parting word of advice: “I sincerely hope you heed the wishes of your shareholders and move expeditiously to negotiate a merger with Microsoft, thereby making a proxy fight unnecessary.”

What’s not yet clear is whether Microsoft is even willing to resume merger talks. Though it’s certainly possible that Microsoft CEO Steve Ballmer and Icahn have been having some back-channel chats about the issue recently …

Yahoo and Microsoft are both trading higher on the news.

News that Yahoo’s (YHOO) board of directors failed to reach any decisions after meeting Friday to discuss the company’s response to Microsoft’s (MSFT) bid has some folks wondering if Yahoo’s directors are, you know, … understandably … er … hesitant about merging with AOL (TWX).

And it has others suggesting that Microsoft and the Internet search pioneer may announce a deal as early as this week. Predicting that Yahoo is unlikely to post stronger-than-expected first-quarter earnings next week, UBS Securities (UBS) analysts Benjamin Schachter and Heather Bellini say they wouldn’t be surprised if in the next few days the company agreed to be acquired by Microsoft. “We still think Microsoft will prevail,” Bellini said in the note. “We would not be surprised to see a deal struck sometime this week, and think it will end up being for a higher price than the original $31 per share offer.”

And who knows, it could happen. A merger of the two companies has seemed a foregone conclusion for quite a while now. As Tech Trader Daily’s Eric Savitz aptly notes, “… in the end, it’s simply obvious. Microsoft needs to buy. Yahoo needs to sell. The rest is a sideshow.” Mafioso Torch Yo, anyone?

The U.S. Justice Department has managed the impossible. It’s brought Howard Stern and Oprah Winfrey together under a single aegis.

This morning the DOJ approved the merger of satellite radio companies Sirius Satellite Radio (SIRI) (home to Stern) and XM Satellite Radio (XMSR) (home to Winfrey), a move that will create a satellite radio company with about 14 million subscribers.

In a statement, the DOJ said it found no reason to think that combining the only two satellite radio players in the market would create a pay-radio monopoly. “After a careful and thorough review of the proposed transaction, the division concluded that the evidence does not demonstrate that the proposed merger of XM and Sirius is likely to substantially lessen competition, and that the transaction therefore is not likely to harm consumers,” the DOJ explained.

“The Division reached this conclusion because the evidence did not show that the merger would enable the parties to profitably increase prices to satellite radio customers for several reasons, including: a lack of competition between the parties in important segments even without the merger; the competitive alternative services available to consumers; technological change that is expected to make those alternatives increasingly attractive over time; and efficiencies likely to flow from the transaction that could benefit consumers,” said the DOJ.

Microsoft (MSFT) and Yahoo (YHOO) are talking again. News.com reports that the two companies are “holding informal merger discussions”–which could mean anything from “the companies are discussing a shared vision of Microhoo” to “Jerry Yang is taking Steve Ballmer’s phone calls again.”

“Yahoo has shown some willingness to have a conversation and talk,” a source familiar with the talks said yesterday.

And?

We would be disappointed in 2008-2009 if we don’t have a very significant position in the display-ad marketplace.

- Tim Armstrong, Google’s North American president for advertising and commerce

Looks like Google’s informal corporate motto, “Don’t Be Evil,” was assurance enough for the European regulators reviewing the company’s proposed merger with online ad-serving vendor DoubleClick.

The European Commission this morning approved Google’s (GOOG) $3.1 billion acquisition of DoubleClick, clearing the way for the unprecedented combination of their advertising services, as well as their vast troves of data about consumer behavior on the Internet.

In a statement, the EC said the deal would be unlikely to have harmful effects on consumers and can proceed without conditions. “The Commission found that the merged entity would not have the ability to engage in strategies aimed at marginalizing Google’s competitors, mainly because of the presence of credible ad-serving alternatives to which customers (publishers/advertisers/ad networks) can switch, in particular vertically integrated companies such as Microsoft, Yahoo and AOL,” the EC explained. “The market investigation also found that the merged entity would not have the incentive to close off access for competitors in the ad-serving market, mainly because such strategies would be unlikely to be profitable.”

Less than two hours after the EU granted its approval, Google announced that the deal had closed. Google CEO Eric Schmidt declared himself “thrilled.” As well he should be: Shares of Google, which have lately been trading down, were up by as much as $18 this morning, or more than 4%, at about $431.

I’m hoping the two of them will beat each other’s brains out over search and leave the display market to us. I think it’s a mistake. But I think Napoleon said never interrupt your enemy when they’re in the middle of making a mistake.”

–AOL CEO Randy Falco, Feb. 26

Hope AOL CEO Randy Falco doesn’t think a merger of AOL and Yahoo (YHOO) is as big a mistake as a merger of Microsoft (MSFT) and Yahoo, because AOL parent Time Warner (TWX) has stepped up merger and joint-venture talks with the besieged company. Engineered to thwart Microsoft’s hostile bid for Yahoo, the deal would see Yahoo acquire Time Warner’s AOL in exchange for the media conglomerate taking a large minority stake in the resulting monstrosity. The companies believe the arrangement would create an online advertising powerhouse. And given the vast success of the AOL/Compuserve, AOL/Netscape and AOL/Time Warner mergers, how could they possibly be wrong?

News of talks follows Yahoo’s extension of the deadline for nominating directors to “10 days following the public announcement of the date for Yahoo’s 2008 annual meeting of stockholders,” a move that will postpone whatever proxy battle Microsoft may–or may not–be cooking up. “As the company has not yet announced the date of this year’s annual meeting, the amendment will give stockholders who want to nominate one or more directors, including Microsoft Corporation, more time to do so,” Yahoo said in a statement. “The amendment does not preclude any party from nominating one or more directors at any time prior to the new deadline.”