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Mon 4 Feb 2008 07:15 PM

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Microsoft faces difficult task in Yahoo! bid

Regulatory constraints and a potentially difficult merger present challenges for Microsoft say analysts

Microsoft will need to overcome regulatory challenges and manage a tricky merger, if its proposed purchase of Yahoo! is to be successful, according to analysts.

Microsoft has made a $44.6 billion unsolicited offer for the web giant, in what is seen as a bid to counter Google.

David Mitchell, SVP of IT research at Ovum, said that although there are potential cost efficiencies in the deal, particularly in R&D and datacentre consolidation, Microsoft would still have to work hard to make the acquisition work.

"Microsoft has not traditionally made acquisitions of this magnitude and so, it needs to demonstrate to the market that it has the vision and appetite to deliver savings, through focused cost reduction," he said.

"Google still represent a formidable opponent for even the combined Microsoft-Yahoo entity to tackle. Make no mistake - Microsoft still has huge challenges," he added.

Mitchell also warned that the current offer for Yahoo!, which values the company at $31 per share, 62% over its market price at time of offering, marked a "full" valuation, and that Microsoft should be wary of spending more than that if Yahoo! execs chose to negotiate.

Yahoo! has yet to react to the unsolicited offer from Microsoft, save from a statement that it would evaluate the proposal "carefully and promptly".

The New York Times reports that Google has been in touch with Yahoo! to discuss a possible strategic alliance to confound the deal, although Google is widely regarded as unable to make a counter-offer, as it would almost certainly not gain regulatory approval under anti-trust laws.

Markets reacted favourably to the news, with Yahoo! shares gaining 48% on Friday, with further gains made this morning, reaching $28.84 today.

Andrew Frank, research vice president at Gartner, also raised concerns over how any potential merger, and warned that regulatory issues could sink the deal, regardless.

"Although the synergies between the two companies, which Microsoft asserts are worth at least $1 billion a year, are certainly great, the merger also raises the question of how effectively they'll be able to continue operating during their integration. The online advertising business requires significant levels of account service and even the perception of a diversion could wind up delivering business to their competitors," he said.

"Antitrust laws are also a concern with any deal of this size. While the current U.S. administration is less likely to pose a problem, in recent years the European Union has aggressively policed similar mergers," Frank added.

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