Google, Yahoo Antitrust Lawyers Give Merger Effort One Last Try

Cecile Kohrs Lindell

The Deal

November 03, 2008

Provided by The Deal

As early as Tuesday, online wannabe search partners Yahoo! Inc. and Google Inc. will take their last shot at winning Justice Department approval for their proposed teaming agreement.

The companies must convince the agency's antitrust regulators the partnership won't be a threat to competition, but insiders say the agreement is unlikely to get antitrust approval because there's no way that an alliance between two of the three big search advertising firms can avoid hurting competition.

Last Thursday, Assistant Attorney General Tom Barnett told lawyers for the companies that negotiations are over, according to a source involved in the regulatory review process who asked not to be named. It was at least the third time Barnett had met with antitrust counsel for the companies in a month. It is rare that parties in antitrust reviews have multiple meetings with the head of the antitrust division and the repeated appearances with Barnett indicate both the misgivings he has about the deal and the importance the companies place on their venture. Typically negotiations over antitrust concerns are limited to staff and senior deputies, with perhaps a single meeting with the assistant attorney general.

The two companies, which originally drafted a 10-year contract, had whittled away the scope of their proposed cooperation and entertained the DOJ's request to cut the contract to as short as one-year. There were also talks over minimizing the amount of searching the companies could cooperate on.

But after failing to reach a final agreement, Barnett drew a line in the sand and said the final proposal must come this week, ideally by Tuesday, which is also election day. While the companies are likely to lob in one last-ditch effort, lawyers are already speculating about what's next for Yahoo! and whether it will be able to recoup some money from Google under the walk-away clause in the companies' contract.

The DOJ could file a complaint seeking a preliminary injunction on the agreement even as the parties assess their options. Antitrust lawyers said the government would have to clear a high hurdle to win a preliminary injunction. But it is even less likely that Google and Yahoo! would want to battle the government in court over such a controversial deal, particularly while the financial market is so precarious, the lawyer said.

DOJ staff lawyers in the litigation area have been putting in a lot of hours reviewing the arrangement and preparing for trial. Moreover, the decision to bring in an antitrust litigation veteran, Sandy Litvack, a Hogan & Hartson litigator and former DOJ official, to head up the team opposing the deal was the worst-kept secret in the antitrust bar this fall.

Google and Yahoo! also hired a stable of high-powered antitrust experts in an effort to push the deal past regulators. In addition to hiring former assistant Attorney General Hew Pate, now a partner at Hunton & Williams, Yahoo! also hired Latham & Watkins litigator Dan Wall, who trounced the DOJ's litigation team in the contested Oracle Corp. takeover of rival PeopleSoft. Yahoo! is also using Michael Weiner and a team of other lawyers from Skadden, Arps, Slate, Meagher & Flom.

Meanwhile, Google is working with two antitrust firms: Cleary Gottlieb Steen & Hamilton, led by David Gelfand, and Wilson Sonsini Goodrich & Rosati, which employs several former government regulators. Susan Creighton once led the Federal Trade Commission's competition bureau, and Renata Hesse once led the DOJ staffers who are now examining this agreement.

Microsoft Corp. has taken a firm stance against the deal, with its own general counsel, Brad Smith, testifying to lawmakers on Capitol Hill that the arrangement could drive up prices for online advertisers, and certainly would undercut Microsoft's ability to compete in the search advertising market.

Microsoft also used an influential outside antitrust expert. Rick Rule, a former assistant attorney general and now a partner at Cadwalader Wickersham & Taft, took an aggressive position on the arrangement, saying it is a clear violation of antitrust law. Rule's concerns about the deal could resonate at the DOJ: Barnett and Deputy Assistant Attorneys General Deb Garza and David Meyer are all former law firm partners of Rule's.

Barnett is expected to announce his departure from the DOJ shortly after the election, and sources said that Garza, with substantial support from the administration, will serve as acting AAG.

On Oct. 20, Google CEO Eric Schmidt endorsed Democratic presidential candidate Barack Obama. In an interview on Bloomberg television, he gave no hint that the likely outcome of the antitrust review had influenced his decision. Instead he said only that it was time for a generational change in leadership and called for the government to play a strong role in the type of "early research" that led to the Internet. Later in the interview, he kept any awareness of the Justice Department's intentions close to the vest. "I wouldn't call it right now," Schmidt said. "I don't exactly know their view."

Yahoo! reached out to Google shortly after it rejected a $44 billion offer from Microsoft earlier this year. Yahoo! officials told shareholders, a significant share of whom were disgruntled over the rejection of Microsoft's offer, that the arrangement with Google would help boost revenues and the added funds could be used to bolster Yahoo!'s presence in other areas of online advertising.