Justice Department to review Google-Yahoo deal

Updated at 7:40 a.m. PDT Wednesday with comments from a former Department of Justice antitrust attorney, and a Department of Justice spokeswoman.

The U.S. Department of Justice plans to gather information from third parties in a probe of the advertising deal struck last month between Google and Yahoo, according to sources familiar with these types of investigations.

Within the next week, the Justice Department is expected to issue civil investigative demands (CIDs) that seek documents from the third parties, said one source, noting the information requested could range from a general request on the competitive landscape to very specific requests involving Yahoo and Google.

Third parties that are expected to receive the CIDs include competitors, customers such as major advertisers, and potential partners, the source added.

Representatives for Yahoo and Google did not immediately return requests for comment. But the Justice Department made a brief statement.

"We're looking at the proposed transaction. We're conducting a civil investigation," spokeswoman Gina Talamona said, declining to offer details about the process or how long it would take.

Yahoo announced the nonexclusive partnership in June under which rival Google would supply it with some search ads, a move that could increase Yahoo search revenue but that also gives Google even more power in the market. Yahoo expects the 10-year deal to raise revenue by $800 million in its first year and to provide an extra $250 million to $450 million in incremental operating cash flow.

The partnership idea came to light during Microsoft's attempt to acquire Yahoo, which put more pressure on the Internet company to improve its financial results.

Faced with that financial challenge and a desire to push the Google ad deal through, Yahoo proposed to regulators that it subject the search advertising deal to a review process similar to one used for major mergers under the Hart-Scott-Rodino Act, said a source familiar with Yahoo.

Under the proposal, which was made to regulators when Microsoft still had a buyout offer on the table for Yahoo, the Internet search pioneer said it would give the Justice Department three and half months to review the deal before it implements the search advertising partnership.

After Microsoft's offer to acquire all of Yahoo was withdrawn, Yahoo could not tell the Justice Department it would not honor its earlier proposal, said the source familiar with the Internet company. The Justice Department and Yahoo later signed a memorandum of understanding that would give regulators time to review documents and interview executives and board members.

"This has been a formal investigation since day one, given its high-profile. There was never the option to have an informal investigation done," said the source, noting a formal investigation entails the Justice Department staff receiving the blessing from a superior like the assistant attorney general in the antitrust division. "And it would be negligent not to issue CIDs to third parties, when conducting a formal investigation."

Only general document requests made so far
The Justice Department has made very general document requests of Yahoo, noted the source. Such requests range from the paperwork and correspondence of executives and board members that address how a transaction or agreement would affect competition to documents on the search market and competitors. And while the document requests are currently general in nature, Yahoo will likely see more specific type of requests in the next 30 to 40 days, added the source.

To date, the Justice Department has not yet interviewed Yahoo executives or board members, but such requests are expected to be made between now and the first week in August, the source noted.

If the Yahoo-Google investigation moves at a pace similar to that of other antitrust cases, the Justice Department may get down to specific issues it wants to address within four to five weeks after Labor Day.

"When the DOJ says, 'We have concerns about...,' it usually means the field has been narrowed," said the source.

One former Justice Department antitrust attorney said the regulators will likely focus on one of two issues, or both--whether Yahoo will have an incentive not to compete as hard as it previously did against Google and whether there is a coordination of competition.

In an effort to dispel antitrust concerns surrounding the deal, Yahoo CEO Jerry Yang went to Capitol Hill in June and met with Sen. Herb Kohl (D-Wis.), who chairs the Senate Antitrust Subcommittee.

Kohl had previously expressed concerns that the deal between two technology search rivals could affect competition and have ramifications for advertisers and consumers. He said at the time that the antitrust subcommittee would investigate the competitive and privacy implications of the deal.

A congressional investigation, however, is separate from a Justice Department investigation.

In this particular case, which is not a merger of two companies, the Justice Department can't force Yahoo and Google to comply with its wishes in order to receive clearance on the deal. Instead, the regulators can either file a lawsuit before, during, or after Yahoo and Google begin their search advertising partnership.

In April, a limited two-week search ad deal was declared a success by Google and Yahoo, but even the limited partnership raised antitrust hackles at Microsoft. Microsoft brought up antitrust concerns when the search ad test began, saying the move would reinforce Google's dominance in the search ad business.

Google countered that search ads are only a narrow part of the online ad market and that Yahoo is the strongest company when it comes to the graphical "display" ads.

Google's share of the U.S. search market reached 68.29 percent in May, according to Hitwise's most recent numbers. Yahoo's share of the market declined to 19.95 percent from 20.28 percent at the same time.

The Washington Post first reported news of the CIDs on its Web site Tuesday evening, citing sources close to the inquiry.

CNET News.com's Dawn Kawamoto and Stephen Shankland contributed to this report.