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There’s no deal yet. But when Robert Lande picked up the phone last Tuesday, Microsoft Corp.’s lawyer Charles “Rick” Rule was on the line, making a pitch. Rule’s argument went something like this: Microsoft and Yahoo Inc., despite their immense size, needed to combine forces to take on Google Inc. in the war for the Web. Their proposed $44.6 billion merger would winnow the search engine market down to two major companies � and create a true competitor for Google. And since Lande and his group, the American Antitrust Institute, are fierce advocates of increased marketplace competition, they should support the deal. If they couldn’t do that, they should, at the very least, remain silent. It was a tough sell for Rule, the D.C.-based chairman of Cadwalader, Wickersham & Taft and a veteran of Microsoft’s antitrust battles. The AAI has been very wary of big combinations, and last year it opposed the merger between Google and DoubleClick Inc. But attempting to win over the group, one of the bastions of the antitrust bar, is just one step in a wider effort by Microsoft’s lawyers to convince the public and federal regulators that a Microsoft-Yahoo deal will be good for consumers. In fact, in the days after Microsoft’s bid, the key players in the Yahoo merger drama had their legal teams beating the antitrust drums: Microsoft with Rule, and Google with David Drummond, the company’s chief legal officer, who hit the blogosphere to bash the deal as anti-competitive. By making its offer for Yahoo, antitrust lawyers say, Microsoft is wagering that past rebukes by the feds will not play a role this time. The company is still operating under a consent decree negotiated as part of its settlement with the Justice Department as part of the epic antitrust case against the company. The decree was recently extended until 2009, and a three-member team at Justice is continuing to monitor Microsoft’s moves. Naturally, the legal work in the proposed Microsoft-Yahoo merger isn’t limited to antitrust lawyers. Mergers-and-acquisitions specialists are getting a big bounce as well. Among the Am Law 200 firms working on various matters are Simpson Thacher & Bartlett; Skadden, Arps, Slate, Meagher & Flom; Cleary Gottlieb Steen & Hamilton; Wilson Sonsini Goodrich & Rosati; and Cadwalader. But it’s the antitrust lawyers who may be key to hammering out a deal between the two companies. And they have their work cut out for them. GOLIATH vs. GOLIATH The slog ahead was evident after Rule and Lande hung up their phones. Two days after they talked, the AAI released a statement that called for regulators to closely scrutinize Microsoft’s bid. Lande, a Baltimore School of Law professor, says he spoke with Rule at length, but his reaction to the merger proposal was less than measured. “There will be less pressure to innovate in the long term,” he says. “The consumer will lose.” Lande, of course, will not be alone in his argument. Antitrust lawyers say a Goliath like Microsoft is going to have a hard time convincing the feds and the public that it’s David against Google. “It’s quite ironic that the entity making the defense-against-giants argument is Microsoft,” says Matthew Cantor, a partner in Constantine Cannon’s New York office. “That’s something you would have never expected a couple years ago.” And the U.S. regulators aren’t the only ones Microsoft will have to convince. Antitrust lawyers say the European Commission may be hard on the deal because of decreased competition among online search engine companies. That’s not to say Google has a slam-dunk case, either. The company would have to prove that a deal would result in less competition, innovation, and consumer choice. And given its size, Google may not be the most credible messenger for that argument. It’s also playing on potentially unfriendly political turf: The Bush administration has been largely merger-friendly, and Microsoft’s decision to act now gives it a chance to finish the deal before Jan. 20, 2009. There’s an irony in the way Google would have to make its argument to the European Commission. Right now, the company is in a struggle of its own with European regulators in its bid to acquire DoubleClick, the Internet advertising giant. The commission stalled the deal partly over concerns that it would concentrate too much online advertising in one entity. Google argued, however, that there was already enough competition. In the Microsoft-Yahoo battle, Google will be forced to invert that argument. Google will have to argue against Microsoft’s economies-of-scale pitch; antitrust lawyers say Microsoft will point out that search engines other than Google’s have been rendered obsolete, and the only way to foster competition is with two dominant search engines. Google does have a team of veterans representing its interests in the Yahoo bid. David Gelfand, a Washington antitrust partner at Cleary Gottlieb, and Susan Creighton, Washington antitrust co-chair at Wilson Sonsini, both helped Google get its merger with DoubleClick past federal regulators at the Federal Trade Commission last year. And Creighton was director of the Bureau of Competition at the FTC before joining Wilson Sonsini in 2006. Microsoft, too, has a connected advocate in Rule. When he goes to the Justice Department, he won’t need introductions. Rule worked with Thomas Barnett, the head of the Antitrust Division, while the two were partners at Covington & Burling. Rule has also worked with Barnett’s deputies. David Meyer, now deputy assistant attorney general for civil enforcement, served as Rule’s special assistant in the Antitrust Division in the late ’80s and then worked with him at Covington. (Skadden partners Michael Weiner in New York and James Venit in Brussels, are representing Yahoo on antitrust matters.) Meanwhile, mergers-and-acquisitions lawyers are trying to maneuver through a very complicated deal. In one corner, representing Yahoo, is Kenton King, a corporate and securities lawyer and partner in charge of Skadden’s Palo Alto, Calif., office. King has been Yahoo’s relationship partner for several years, brokering the company’s $436 million unsolicited takeover of HotJobs.com in 2002. (Yahoo general counsel Michael Callahan was an associate at Skadden before joining Yahoo in 1999.) In another corner is Microsoft’s counsel, Simpson Thacher’s New York-based partners Charles Cogut, Kathryn King Sudol, and Alan Klein. Lawyers involved say the firm played a role in last year’s merger talks between Microsoft and Yahoo, which broke down after Yahoo execs decided they still had a chance to turn around flagging profits. Watching the mess is Brad Smith, Microsoft’s GC and a former Covington partner who practiced with Rule. To stave off the takeover, Yahoo has tried to find an outside bidder that would pay more than the $31-per-share offer made by Microsoft. That includes Google, though lawyers involved in the talks say Google has not retained outside M&A counsel to look into a possible deal. Lawyers say Yahoo is in a precarious position, comparing Microsoft’s play to the strategy used by media mogul Rupert Murdoch in acquiring Dow Jones & Co. last year: Bid just high enough for shareholders to find it impossible to say no. “When the board of directors gets a hostile offer, they have to look at their company and ask if they have any credible strategy to say that this company is worth more than what has been offered by Microsoft,” says a D.C.-based M&A lawyer who has Yahoo for a client but is not involved in the deal. “To the extent that they can’t, the board would owe the shareholders of Yahoo maximized value, and that means a sale.” Beyond a sale � or partial sale to a third party, making Yahoo less attractive to Microsoft � Yahoo’s final alternative would be its poison pill, a provision the firm put in place in March 2001. John Laide, vice president with FactSet Shark Repellent, which provides research on corporate takeovers, says the Yahoo provision is fairly ordinary and does not provide large executive bonuses. Under the provision, once Microsoft buys 15 percent of Yahoo’s shares, other shareholders would be able to purchase stock at half-price, greatly reducing Yahoo’s worth. Mergers lawyers say that in a truly hostile takeover, Microsoft could go to the Delaware Court of Chancery and sue on the grounds that the poison pill demonstrates the board is not meeting its fiduciary duty to stockholders. But that scenario remains unlikely. Mergers lawyers say Yahoo will probably accept a bid from Microsoft. And that’s when the regulatory chess game really begins.
Nathan Carlile can be contacted at [email protected].

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