SAN FRANCISCO - Microsoft Corp.'s proposed $42 billion purchase of Yahoo Inc. would establish the world's largest software maker as a "strong No. 2 competitor" against online search leader Google Inc., Microsoft CEO Steve Ballmer said Monday.
Speaking to a group of analysts in New York, Ballmer said the acquisition of Yahoo would raise competition, rather than eliminate it, in the Web search and advertising market.
"Google's clearly got a dominant position. They've got about 75 percent of paid search worldwide," Ballmer said. "We think this enhances competition. Anything else would be less good from that perspective."
On Sunday, a Google executive said Microsoft could use the acquisition to gain too much control over the Internet, underscoring the online search leader's queasiness about its two biggest rivals teaming up.
Google's opposition isn't a surprise, given that Microsoft views Yahoo as a crucial weapon in its battle to gain ground on Google.
"This is about more than simply a financial transaction, one company taking over another. It's about preserving the underlying principles of the Internet: openness and innovation," Google chief legal officer Michael Drummond wrote in the company's blog.
Yahoo so far has had little to say except that its board will carefully examine Microsoft's bid -- a process that "can take quite a bit of time," according to a message posted on the Sunnyvale-based company's website.
Also Monday, Microsoft Chief Financial Officer Chris Liddell said he expects a deal with Yahoo to be completed by the end of the year.
Yahoo shares jumped 77 cents, or 2.7 per cent, to $29.15 in Monday morning trading, while Microsoft gained 5 cents to $30.50. Google shares fell $10.27, or 2 per cent, to $505.63.
Since announcing its unsolicited bid early Friday, Redmond, Wash.-based Microsoft has been trying to depict a Yahoo takeover as a boon for both advertisers and consumers because the two companies together would be able to compete against Google more effectively.
But Google is painting a starkly different picture, asserting that Microsoft will be able to stifle innovation and leverage its dominating Windows operating system to set up personal computers so consumers are automatically steered to online services, such as e-mail and instant messaging, controlled by the world's largest software maker.
In a move that illustrates just how badly Google wants to torpedo the deal, Google Chief Executive Officer Eric Schmidt called Yahoo CEO Jerry Yang Friday to offer his help in repelling Microsoft, according to a report Sunday on The Wall Street Journal's Web site, which cited anonymous people familiar with the matter.
The assistance didn't include a counterbid, but may have included supporting other potential suitors, or a revenue guarantee in exchange for an ad partnership with Yahoo, the people said, according the newspaper.
AT&T Inc., Time Warner Inc. and News Corp. aren't planning to enter the bidding, the Journal said, citing the people familiar.
To help make its point, Google pointed to the way Microsoft previously used Windows to help extend the reach of its Web browser and other applications -- a strategy that triggered a U.S. Justice Department lawsuit alleging the software maker illegally used its operating system to stifle competition. The dispute ended with a 2002 settlement that required Microsoft to abandon some of its past practices.
"Could Microsoft now attempt to exert the same sort of inappropriate and illegal influence over the Internet that it did with the PC?" Drummond wrote.
Brad Smith, Microsoft's general counsel, said preventing Microsoft from buying Yahoo would undermine competition by allowing Google to become even more dominant than it already is on the Internet
"Microsoft is committed to openness, innovation, and the protection of privacy on the Internet," Smith said. "We believe that the combination of Microsoft and Yahoo will advance these goals."
If they get together, Microsoft and Yahoo would have about 16 per cent of the worldwide Internet search market -- still far behind Google's 62 per cent share, according to comScore Media Metrix. But Microsoft and Yahoo already are far bigger in than Google in e-mail and instant messaging, and conceivably would be in a better position to squash rival services if they combined.
In its Web site posting, Yahoo has said its review of the proposal "will include evaluating all of the company's strategic alternatives, including maintaining Yahoo as an independent company."
Most analysts believe Yahoo will have little choice but to sell to Microsoft, with its stock price near a four-year low at the time of the bid and its profits falling since late 2006. When it was first announced, Microsoft's offer was 62 per cent above Yahoo's market value -- a premium analysts doubt any other suitor will be able to top.
If Yahoo accepts, antitrust regulators in both the United States and Europe are expected to begin an exhaustive review that some experts think could last a year. Microsoft believes it could get the necessary approvals to take over Yahoo late this year.
If nothing else, Google probably will try to raise enough alarms about the Microsoft-Yahoo deal to delay its approval for as long as possible. By doing so, Google would have more time to draw up plans to counteract the combination.
Google also is borrowing a page from Microsoft's book by urging antitrust regulators to take a hard look at the proposed marriage between its two rivals.
Just days after Google struck a $3.1 billion deal to buy online ad service DoubleClick Inc. last year, Microsoft began lobbying regulators to block the transaction. U.S. regulators blessed Google's DoubleClick acquisition late last year after an eight-month review, but the antitrust inquiry in Europe remains open.
