Investors dreaming of a buyout bidding war between Microsoft (Nasdaq: MSFT ) and Google (Nasdaq: GOOG ) over Yahoo! (Nasdaq: YHOO ) need to snap out of it. It's just a dream.
Earlier today, The Wall Street Journal reported that Google is talking to private equity firms to acquire Yahoo!'s core business and also noted that Microsoft is weighing a bid with the help of Silver Lake Partners and the Canada Pension Plan Investment Board.
It's all a bit of deja vu for Yahoo! investors. Remember three years ago, when Yahoo! and Google reached an agreement for a paid-search advertising deal while Yahoo! was in the midst of battling it out with Microsoft's hostile-buyout overtures?
In the end, the Yahoo!gle advertising deal was yanked. Google chickened out of consummating the Yahoo! search-advertising deal, according to sources at the time, after the Department of Justice's antitrust regulators threatened to file a lawsuit to challenge the deal and would consider adding a monopolization count to the lawsuit.
Having a monopolization count, if it the DOJ had filed suit and prevailed, could have opened a Pandora's box for Google and subjected it to the scrutiny Microsoft faced years before.
Top 5 Reasons Google Won't Buy Yahoo!
Fast-forward to today, and we can easily come up with reasons the Internet search giant will probably sit this one out.
1. Google doesn't want to be labeled a monopolist, a.k.a. another Microsoft. A monopolist label rightly strikes fear in the heart of the Internet behemoth, because with such a label comes greater regulatory scrutiny that can hinder buyouts, partnerships, or the ability to purchase pieces of a business.
2. Google can try to argue that Yahoo!, as noted in a recent ZDNet article, recently extended its paid-search advertising agreement with Microsoft through 2013. And although the search giant may argue to antitrust regulators that it would seek to continue that agreement post-acquisition, who's to say that the Redmond giant would want that? Regulators, of course, would slap down any prospect of a Yahoo!gle paid-search advertising arrangement -- given that they did the same just three years ago.
3. Google may try to argue that it and Yahoo! are not the dominant players in display advertising. But really, come on now. According to The Wall Street Journal, Yahoo! is the No. 2 player, with $1.6 billion in display advertising revenues, and Google is No. 3, with $1.1 billion. Combine Yahoo! and Google, and that makes $2.7 billion in display advertising revenues, surpassing Facebook's estimated revenues in excess of $2 billion for display advertising.
4. The Senate last month held a hearing regarding concerns over Google's exertion of monopolistic behavior, according to a Wall Street Journal report. With such a recent grilling by Congressional members, why would Google want to fan the fires of scrutiny?
5. But the biggest reason of all for Google to forgo a Yahoo! purchase is that it's currently under sharp scrutiny by the Federal Trade Commission. In a June filing with the Securities and Exchange Commission, Google said: "On June 23, 2011, Google Inc. received a subpoena and a notice of civil investigative demand from the U.S. Federal Trade Commission (FTC) relating to a review by the FTC of Google’s business practices, including search and advertising. Google is cooperating with the FTC on this investigation."
And Microsoft recently weighed in with FTC investigators to complain about Google's alleged illegal advertising rate increase for the software giant, according to a Bloomberg report.
So, in other words, now is not the best time for Google to hook up with Yahoo!
Google's not a pawn
If Yahoo! is using Google as a pawn to try to elicit higher bids from other contenders, such as former News Corp. executive Peter Chernin and Providence Partners (as noted in The New York Times), or AOL (NYSE: AOL ) , or Alibaba Group's Jack Ma, who saw his company launch a successful IPO with Alibaba.com, or Microsoft, these companies are probably also following the FTC's investigation into Google and coming with the same takeaway that investors should.
Can't get enough of Yahoo! and its potential buyers and want to stay in-the-know? Add them to your free Watchlist that delivers up-to-date news and analysis on your favorite companies: