Lobbying fight is waged in Microsoft's bid for Yahoo

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By VERNE KOPYTOFF

Allies could help oppose any of the possible mergers

Microsoft Corp.'s takeover bid for Yahoo Inc. has yet to succeed, but that hasn't stopped preparations for what would be the next step -- the regulatory battle.

Both Microsoft and rival Google Inc. have started opposing campaigns to woo public interest groups in Washington, D.C., as part of a broader lobbying effort aimed at knifing each other in the back. The Center for Digital Democracy and Consumers Union, two organizations that often pressure antitrust regulators to block mergers, have held a number of discussions with both companies.

"They'll do anything to attempt to undermine each other," said Jeff Chester, executive director of the Center for Digital Democracy.

It's a window into how competition plays out in Washington, where gaining allies or muting criticism is an important part of corporate strategy. The gamesmanship can help sabotage a challenger's plans or limit them.

With its bid for Yahoo, Microsoft hopes to bolster its online business by creating an Internet colossus. But so far, Yahoo has rebuffed the overtures, calling the offer -- originally valued at $44.6 billion -- inadequate.

Yahoo directors met Friday to consider Microsoft's bid, a person familiar with the talks said. Yahoo spokeswoman Tracy Schmaler declined to comment, saying the company doesn't confirm when its board meets.

As an alternative, Yahoo is considering a three-way partnership with Google and Time Warner's AOL that would keep the Sunnyvale, Calif., Web portal independent. Word of the complex alliance emerged Wednesday, adding a layer of intrigue to the two-month merger drama.

Google fears that a combined colossus could limit user access to rival Internet products and give it too much control in e-mail and instant messaging, areas where it would hold dominant market share.

Left unsaid is that Google's position as the leader in online advertising could also face a serious challenge, particularly in what's known as display advertising, which is the equivalent of online billboards.

Chester said he has spoken with Microsoft's lobbyists by phone and in person a number of times, as they try to win his support for the merger or, at least, defuse any opposition. They explained, as they have publicly, that combining forces would create a more serious competitor to Google's juggernaut.

Google's pitch, Chester said, came at an event about privacy it hosted two weeks ago at its Washington office, after a filet mignon dinner with a few dozen other invitees. A Google political strategist pulled him aside and asked that he help to scuttle the deal, he said.

"I'm seen as somebody who can influence the press and as someone who has contacts in the Federal Trade Commission, and frankly as a troublemaker," Chester said.

In fact, Chester hasn't taken a position on the merger, given that there hasn't even been an agreement. In any case, he said that it's so complicated that it can't be simply described as good or bad.

"There are questions that have to be addressed," Chester said.

Google declined to comment. But it made its views known in a blog post in February by David Drummond, Google's chief legal officer, who raised several questions about a deal and called on policymakers to get involved.

Microsoft did not provide a spokesman for an interview. In a letter to members of Congress just after its bid for Yahoo, it cast the merger as "pro-competitive" and a boon to online advertisers and publishers.

The Justice Department and a handful of congressional committees have expressed interest in reviewing any merger. Lawyers have said that such a deal would be bound to receive intense scrutiny, particularly because of Microsoft and its past run-ins with regulators over its business practices.

"With Microsoft, there will be greater attention paid to antitrust than with other companies," said Steve Diamond, a law professor at Santa Clara University.

Any Yahoo partnership with Google for search advertising beyond a current two-week test and an alliance with AOL would also likely be reviewed. House Judiciary Committee Chairman John Conyers, D-Mich., said Thursday that that potential underscores the need for a hearing about competition on the Internet and online advertising.

Chris Murray, senior counsel for Consumers Union, said his discussions with both Microsoft and Google will help him decide what position to take on a merger or its parts. Although both sides seek his support or to limit his criticism, the talks also save a lot of time in terms of getting basic information about a proposed deal.

"Formal letters going back and forth between the parties move at the pace of months, versus discussions where I can come in with a straight-ahead question."