Digital Media

Updated at 9:47 a.m. PST, with details about the likelihood of any potential Yahoo overture to Microsoft.

If Yahoo wants to get Microsoft back to the negotiating table, it would do well to try the lure of a search-only deal--regardless of whether Jerry Yang is CEO.

That's the assessment from one influential Microsoft source.

"If Jerry was still CEO and called Steve tomorrow and said, let's talk about a search-only deal, I think Steve would listen," said the source. "Microsoft is open to a mutually beneficial search deal. But people are still lusting after a Yahoo (buyout) and no one is thinking about that in Redmond. There's been no discussion of it for months and months."

Apparently, the "lust" is still alive. In early morning trading Tuesday, as the stock market opened in the wake of the news that Jerry Yang will be stepping down as CEO, Yahoo's shares soared nearly 12 percent to $11.90 a share. Meanwhile, analysts churned out research notes speculating that Microsoft may come back with an offer to buy the entire company.

Analyst Benjamin Schachter at UBS noted in a report:

We still believe Microsoft will eventually own Yahoo. Jerry moving out of the CEO role may accelerate this. Yahoo is a key strategic asset in the online space and given the scarcity of key players of size, we see value here not reflected in the stock's current valuation.

UBS has a price target of $18 a share for Yahoo.

Analyst Jeffrey Lindsay of Sanford C. Bernstein said in his research note that Yang's resignation is a good sign, because it demonstrates Yahoo's board is frustrated with the company's performance and management. He further notes:

It is a signal they are prepared to examine more deal options, in particular with Microsoft.

Back in May, Microsoft walked away from the negotiating table after sweetening its initial unsolicited buyout bid for the entire company from $31 a share to $33 a share. But when Yahoo countered with a proposal of $37 a share, Microsoft ended its buyout talks for the entire company.

Yahoo's stock had closed at $19.18 a share on the day before Microsoft announced its $31 a share buyout offer.

The source noted that Yahoo and its investors should bury the notion of a full-up, or entire buyout, of all of Yahoo. If Yahoo were to come to the Redmond giant with a search-only buyout or a search-only partnership, however, that would get its attention--whether it's delivered by Yang or not.

And the source added that any expectation on Yahoo's part to reclaim the approximately $8 billion to $10 billion Microsoft had offered back in late May under its previous search-only, or "hybrid," deal would be a faulty assumption.

Yahoo's shares were trading in the $27 a share range when Microsoft submitted its search-only proposal. Yahoo's shares closed Monday at $10.63 a share.

"Microsoft would not be willing to buy Yahoo's search business at the price offered back in May," said the source.

Should Yahoo take the initiative and approach Microsoft with a search-only partnership, joint-venture, or proposal to sell just its search business, the source offered up one piece of advice to make the process smooth.

"Consistently, Yahoo's board didn't believe Steve. A hundred percent of everything he said in public was what he thought," said the source. "If people go back and carefully read his public statements, they'll see that what Steve said is what Redmond has been thinking."

Microsoft will likely have to wait awhile for any overtures from the Internet search pioneer, said one source familiar with Yahoo's thinking.

Yahoo is launching a CEO search and, as a result, would want to receive input from the new executive on whether it makes sense to approach Microsoft about a search-only deal or partnership.

As previously reported, the companies have not been in recent contact to date.

See also:
• Yahoo CEO Yang to step down
• Yahoo's ultimate search: A new CEO
• Yang's travails: A Yahoo timeline
• A pity for Yahoo that John McCain didn't win
• Jerry Yang memo to staff about stepping down

Yahoo has no search advertising deal with Google, and ditto for its disappointment in luring Microsoft back to the table for an outright buyout of the entire company. But what it does have to show for its efforts is a $73 million bill to outside advisers, according to the company's filing with the Securities and Exchange Commission.

According to the SEC filing, filed last week, here are the various components that make up the $73 million bill:

Income from operations for the three and nine months ended September 30, 2008 includes incremental costs of $37 million and $73 million, respectively, for outside advisers related to Microsoft's ("Microsoft") proposals to acquire all or a part of the company, other strategic alternatives, including the Google agreement, the proxy contest, and related litigation defense costs.

The Internet search pioneer began accruing its bill back in February, when Microsoft launched its unsolicited buyout bid to acquire the entire company for $31 a share. That offer was later upped to $33 a share, but withdrawn in May after Yahoo countered with a $37 a share price and time had, in essence, lapsed to complete a deal before a change in presidents.

When Microsoft stepped away from the negotiating table, Yahoo faced another fight on its hands when shareholder activist Carl Icahn launched a proxy fight against the company to gain control of the board. Ultimately, the parties settled and Icahn and two representatives from his dissident directors slate in the Yahoo proxy fight were named to the Internet search pioneer's board of directors.

Meanwhile, more recently, the company's search advertising deal with Google, which was discussed when Microsoft was still in the hunt for the Internet company, fell by the wayside this month after antitrust regulators said they would file a lawsuit to block the deal and Google opted to step back from the agreement.

While those various expenses have subsided, one continuing cost for Yahoo is defending itself against the number of shareholder lawsuits that were filed after it rejected Microsoft's initial $31 a share bid and its sweetened $33 a share offer.

When Microsoft made its first offer in February, Yahoo's stock was trading in the high $14 a share range. Today, the stock is trading in the low $11 a share range.

Yahoo shares went into a free fall Friday morning, following comments made by Microsoft CEO Steve Ballmer that the software giant would not make a renewed bid for Yahoo.

Shares of Yahoo plummeted as low as 16.5 percent in Friday trading, landing as low as $11.65 a share.

Ballmer, speaking at a Committee for Economic Development of Australia , said:

Look, we made an offer, we made another offer. It was clear that Yahoo didn't want to sell the business to us, and we moved on.

We are not interested in going back and relooking at an acquisition...I don't know why they would be either, frankly.

Investors apparently were holding out hope deal talks would be reignited, after Yahoo CEO Jerry Yang on Wednesday said at the Web 2.0 conference that Yahoo was willing to sell the company to Microsoft:

To this day, I have to say that the best thing for Microsoft to do is to buy Yahoo. I don't think that is a bad idea at all...at the right price, whatever the price is, we are willing to sell the company.

We were ready to negotiate, we wanted to negotiate a deal, and we felt that we weren't that far apart. But at the end of the day, they withdrew and they since have been very clear about not wanting to buy the company.

Yang made those comments on the same day that Google walked away from their planned search advertising partnership, after federal antitrust regulators informed the companies it would file a lawsuit to block the deal should they proceed.

Yahoo, which had hoped to generate $800 million in revenue in the first year of that search advertising agreement, unveiled the Google partnership plans last June, within hours after announcing buyout talks with Microsoft were over and the software giant was no longer interested in acquiring the company at its previous offer of $33 a share. Yahoo had countered with $37 a share, before Microsoft walked away.

But Sandeep Aggarwal, an analyst for Collins Stewart, noted in a research report Friday that the market is overreacting to Ballmer's comments:

We do not view Ballmer's comments about no interest in (a Yahoo) acquisition as an incremental data point. What is more important and incremental is that CEO Ballmer's comments are providing clear endorsement that (Microsoft) is still very interested in a search only deal (a clear positive for Yahoo). Since Microsoft walked away from YHOO on June 12, we have been consistently highlighting that Microsoft will very likely come back but for a search only deal and we stand by our thesis. Investors do not have to see a full YHOO acquisition right now to realize full and fair value for YHOO and a search only deal by Microsoft can provide material upside to the shares of YHOO. We believe that MSFT's search proposal can give $8 to $10 per share lift to Yahoo even based on very simple and achievable economics.

We will take today's weakness in the shares of YHOO as an opportunity to get into YHOO as Yahoo offers material option value for its search business, especially now that we all know that MSFT continues to be very interested in that business.

We expect to see a search-only deal proposal from Microsoft. This proposal may not be as lucrative as the one we saw on May 29, but it can still give $8 to $10 per share lift to YHOO. We believe that a new proposal from MSFT is a very near-term event.

We would highlight four reasons (for Yahoo to accept a search-only deal from Microsoft) 1) No material upside to the shares of YHOO on fundamental basis but a possible search deal with MSFT can easily give $8 to $10 per share lift, 2) Google continues to make YHOO less relevant in search and it is better to get a premium for the search business now from MSFT before it is too late, 3) Core search is emerging as a duopoly and companies that are willing to invest billions in Cap-Ex and deploy thousands of engineers will emerge as the top providers and YHOO has not made and cannot make that level of investments, and 4) a shift of focus from search to the rest of the businesses can help YHOO's management to provide investors a material upside in valuation in the next two to three years with laser focus and unparallel execution.

Yahoo investors have been on a wild ride this year, with every comment from Ballmer and Yang sending the stock on roller-coaster ups and downs.

Yang's comments regarding Microsoft on Wednesday sent Yahoo's shares up as much as 11 percent to $14.84 a share, despite the duel announcement that the Google deal was over.

Early Wednesday morning, the Department of Justice notified Yahoo and Google that if they proceeded with their controversial search agreement, it would file a lawsuit to block the deal.

In some ways, the DOJ's decision was not terribly surprising. Over the past two or three weeks, federal antitrust regulators became increasingly wary of the agreement and, in particular, tested Google's resolve to remain in the deal, according to sources. Over the past few weeks, the give-and-take of negotiations between the parties seemed to be forward progress, but faltered as government regulators became increasingly unyielding in their demands.

"Up until a few weeks ago, there was a lot of back and forth," said one source. "After that, they began turning everything down."

Regulators, however, did not view it their role to advise the companies on how best to get the deal passed. Rather, sources said, they were there to evaluate the deal, as it was presented to them and any future versions that were submitted.

"We dealt with the (companies') proposals, as they made them...The suggestions for changes came from them," noted a source, who added that many of the things Yahoo and Google proposed were found to be anti-competitive.

Then things headed further south. Regulators, at one point two or three weeks ago, told Google that if it pursued a lawsuit to block the deal, it may consider adding a monopolization count against Google to the complaint, which in essence would allege the search giant of using its monopoly power in a relevant market. Apparently that hit a nerve with the search giant, noted a source, and it became evident to regulators that Google's resolve to fight a legal battle was wavering, rather than face the prospect of being saddled with the label of a monopolist and all the regulatory oversight that could potentially come with it.

Under its initial 10-year agreement announced in June, Yahoo would run Google's paid search ads on its own search pages and those of other third-party publishers. In return, Yahoo would get a cut of the advertising revenue.

Although the initial agreement did not call for caps that would limit the number of times Yahoo could run Google search ads on its own search pages, the companies increasingly began throwing out lower and lower caps to appease regulators, who were concerned Yahoo would either turn over its entire search advertising business to Google, or exit the business altogether, sources said.

While regulators, to some degree, appreciated the companies cutting their 10-year agreement to 4 years and then eventually 2, the caps increasingly became a tough pill to swallow.

In the last revised proposal before terminating the agreement, the companies had offered to not only limit the deal to two years, but also put a 25 percent cap on the amount of revenue Yahoo could receive from Google under the arrangement.

But there was nothing in the deal that would have prevented Yahoo, for example, from applying its 25 percent cap to a specific category of Yahoo's search advertising, thereby concentrating Google's presence in a particular part of Yahoo's search platform. The companies, however, did not see the benefit to advertisers, nor themselves, in using randomized search on Yahoo's search pages.

"Prior to two or three weeks ago, it seemed the regulators thought the cap was a promising solution," said a source. "But that changed over the last couple of weeks. Now, all sorts of problems were being identified with it."

During the course of the review process, the companies had extended the 100-day deadline it set in June from October 8 to October 22, as talks progressed among the parties. But as the latest extension deadline approached Wednesday, it became evident no further extensions were needed.

"In the last 24 hours, we really began to understand that the DOJ would not accept any deal under any terms," said a source.

No surprise, then, that the DOJ informed the companies Wednesday morning it would challenge a deal if they moved forward, resulting in Google backing away from the deal.

Yahoo shares edged up Tuesday as analysts and the company's own major shareholder and director Carl Icahn said they longed for the Internet search pioneer to entertain a search-only deal with Microsoft.

That recommendation followed reports Monday that Yahoo and Google have dramatically watered down their initial search advertising proposal, as a means to gain approval from federal antitrust regulators.

Analysts with Sanford C. Bernstein & Co. said in a research note that Yahoo should dump its Google deal and turn its attention back to Microsoft, which previously had offered as much as $33 a share for the entire company and later came back with a search-only acquisition offer. Both deals were rejected by Yahoo.

Said Bernstein analysts:

We think the Google and Yahoo proposal to the DOJ, as reported in the press, to limit the deal to 25 percent of Yahoo's paid search revenues and to reduce the term of the deal from 10 years to 2 years is a desperate gambit that is likely to fail.

We expect the DOJ to defer a decision to next year and believe they are preparing for an antitrust showdown with Google. We expect the Google-Yahoo deal to founder, leaving Yahoo unable to acquire AOL's portal and stuck in a standalone value trap.

Under these circumstances we think that Microsoft might come back in the new year with a reduced bid in the region of $20/share...

And the Bernstein analysts are not alone in their hope for a Microsoft comeback.

Yahoo shareholder and director Carl Icahn, appearing Monday on CNBC, reiterated his hope of a Microsoft-Yahoo deal:

I have said publicly and will continue to say it...I believe, as a large shareholder...that eventually Yahoo should, if it's available, make a deal with Microsoft to sell the search business.

And while he doubts Microsoft is interested in buying all of Yahoo, Icahn noted that Yahoo could "save a fortune" if Microsoft operated its search business.

While the Redmond giant has yet to make any public moves in that direction, its CEO Steve Ballmer is still keeping an eye on the company. Just last month, Ballmer said during a Gartner keynote presentation that an acquisition of the company "still made sense" for Yahoo and Microsoft shareholders.

That sent Yahoo's share price on a rocket ride before Microsoft issued a statement that there were no talks going on between the companies and that the software giant had no interest in acquiring Yahoo.

As for Yahoo's shares Tuesday, the Internet search pioneer was up 4.7 percent to $13.35 a share in late afternoon trading.

Bouncing the ball back to federal antitrust regulators, Yahoo and Google have reportedly revised their search advertising agreement with caps, according to a report in The Wall Street Journal.

According to the report, the companies sent a revised proposal to the Department of Justice over the weekend that calls for such significant changes as limiting the 10-year agreement to 2 years and, more importantly, placing a cap of 25 percent on the amount of revenue Yahoo can generate from Google under the deal.

The controversial search advertising deal calls for Yahoo to place Google's ads on its own relevant search pages. Under the initial deal, Yahoo had hoped to receive $800 million within the first year of the agreement.

But whether such a proposal would fly with Department of Justice officials has yet to be seen, given antitrust regulators have wanted a cap closer to the 20 percent range, one source familiar with the discussions told CNET News.

Regulators have been concerned that a Yahoo-Google agreement would lead to higher advertising prices and Yahoo exiting the search advertising business altogether if it found the Google deal lucrative enough.

Hence, regulators believed the cap on the percentage of Google ads that could appear on Yahoo search pages would serve as a means to keep the Internet search pioneer in the game.

The companies had been balking at such low caps, noting it would offer little economic benefit to their arrangement, sources familiar with the deal previously told CNET News.

It remains to be seen whether such a revised deal would go through and whether Yahoo's cut of the action would be reduced to $200 million, rather than $800 million.

Representatives for both companies declined to comment on their discussions with regulators, other than to note that the process is continuing.

"We are continuing to have cooperative discussions with the Department of Justice about this arrangement and agreed to a brief delay in implementing the agreement while those discussions continue. We are confident that the arrangement is beneficial to competition, but we are not going to discuss the details of the process," Adam Kovacevich, a Google spokesman, said in a statement.

Should an agreement be reached, the DOJ would likely file a consent decree with the courts, which would carry the same force as a court order. Typically, consent decrees last 10 years, or as little as 5 years, so a 2-year consent decree would be short, a source told CNET News.

And in these types of arrangements, the DOJ would likely insist a monitor would put in place to ensure the structure of the consent decree was upheld, with the monitor reporting to the DOJ but whose salary would be paid by the companies, the source added.

Yahoo and Google are nearing a point where they'll have to decide whether to fish or cut bait on regulatory approval for their search advertising deal.

During the past two months, efforts to appease federal antitrust regulators have gotten bogged down with potential restrictions on the deal. As a result, the companies' enthusiasm for its search advertising partnership has turned into frustration, raising speculation that the parties might walk.

"I still like the concept of the (Yahoo-Google) deal," said one source familiar with the agreement, but who noted taking on a legal challenge by the Department of Justice is not a step the companies would likely entertain.

As a result, that leaves the companies with a decision to either accept a deal on the DOJ's terms or walk away altogether. One of the parties involved notes walking away is not such a bad option but, of course, it would sink the deal since it takes two to transact.

Under the terms of the deal, announced back in June, Google would run its paid advertisements on relevant Yahoo search pages. Yahoo, in return, expected to generate as much as $800 million in revenues from Google during the first year the partnership was in place. Both companies agreed to wait 100 days before implementing the arrangement, in order to give the DOJ time to review the deal.

But a major concern of the DOJ, as well as advertisers such as the Association of National Advertisers, is a possible hike in advertising rates and a possibility that Yahoo may find the Google partnership so lucrative that it might eventually outsource its entire search advertising business to its rival.

The main bone of contention between the DOJ and the companies has been over a cap that regulators want to place on the percentage of search ads that Google can place on Yahoo's search pages, according to sources familiar with the transaction.

"They think by keeping the percentage so low, it will force Yahoo to stay independent and continue to keep its search business alive," said another source familiar with the transaction.

This source added that the cap is so low it barely makes economic sense to move forward with the deal.

Nonetheless, representatives from both companies say the talks with the DOJ are ongoing.

"We are continuing to have cooperative discussions with the Department of Justice about this arrangement and agreed to a brief delay in implementing the agreement while those discussions continue. We are confident that the arrangement is beneficial to competition, but we are not going to discuss the details of the process," said Adam Kovacevich, a Google spokesman.

And Yahoo's spokeswoman echoed a similar view.

"We have been working with the Department of Justice regarding our agreement with Google and those discussions are ongoing. As we have said, we believe strongly that this agreement will strengthen Yahoo's competitive position in online advertising and will help to drive a more robust, higher quality Yahoo marketplace for our advertisers, publishers and users," said Yahoo spokeswoman Tracy Schmaler.

Hammering out a resolution both parties could accept has lead to brief delays in implementing the deal, which one source noted is common in negotiations. The companies waived their prior October 8, and then October 22, deadlines by which the DOJ had to weigh in with its final decision on whether it would block the deal, require remedies, or allow it to pass through in its current form.

The DOJ is a breath away from making a decision, said one source familiar with the talks.

A DOJ ultimatum that calls for accepting the caps, or face a legal challenge, puts the onus on the companies to determine the timing of taking the next step. And depending on what that next step may be--walking away from the deal or accepting the caps--would affect the DOJ's final decision, sources said.

Another source familiar with the talks noted a resolution is expected soon and believed there was a good chance it would happen before Thanksgiving.

Meanwhile, an article in The Wall Street Journal on Friday cited sources who said the companies may walk away from the deal as early as the middle of next week.

One area that the companies apparently do not have to contend with is facing two major formal investigations simultaneously.

The European Commission, which is conducting an informal investigation into the North American Yahoo-Google partnership, has yet to decide whether there are enough jurisdictional issues to warrant its involvement in the transaction. If it determines to take action, it would file a formal inquiry.

"We are close to making a decision, but not very close," said one source familiar with the transaction.

In part, the European Commission is awaiting the DOJ's decision in order to avoid having any influence on their actions, noted the source, who also said the European regulatory agency does not want to appear as an interloper in a case that predominately affects U.S. companies.

Investors pushed shares of Yahoo up in morning trading Wednesday as analysts point to stronger profit margins due to cost cutting and a healthy increase in its search advertising revenues.

The Dow Jones Industrial Average, meanwhile, was down 298.30 points to 8,739.12 and the Nasdaq fell 34.01 points to 1,662.67.

Yahoo rose as high as 5.8 percent to $12.77 a share in intra-day trading, following weak third-quarter results it reported after the markets closed Tuesday. Yahoo's shares were moving in the black in the morning, while the broader markets were posting losses.

USB Securities analyst Ben Schachter noted that while the Internet search pioneer still has a number of problems it has yet to resolve, he remains bullish on the stock for several reasons.

The Wall Street analyst cites several actions the company announced, ranging from cutting 10 percent of its headcount to potential in building its core display advertising business.

Said Schachter in his note:

We still like the display strategy, though execution is key--Yahoo is the clear leader in display. If it can execute against its plan (centered around the APT platform), Yahoo could build a scalable, highly targeted and measurable display ad platform and network that would dominate display advertising across the Web.

Cost cutting--The company announced its intention to cut $400 million in annual operating expenses by the end of 2008 and to pursue "substantial additional cost savings" in 2009.

Schachter, who reiterated his "buy" rating and 12-month $20 price target, also pointed to Yahoo's cash, the fact that short-term and Asian investments combined are worth $7 a share, and that an eventual Microsoft acquisition remains a possibility.

Other analysts, however, remain cautious on the stock.

J.P. Morgan's Imran Khan noted in his report that while Yahoo's search advertising revenues grew 17 percent year over year, it may not be enough to turn the tide against market share losses.

Khan wrote in his research note:

We think long tail advertisers are shifting money from nonperformance-based advertising to the performance-based model and that Yahoo is seeing the benefit of this trend. Additionally, some of the monetization improvement the company made earlier this year supported RPS (revenue per search) growth of 11 percent year over year in the U.S. While we were encouraged by RPS gains, we are still concerned with market share losses. We believe that if the company continues to lose market share, the monetization improvement may stall.

Khan also expressed concerns Yahoo may be losing market share in its core display advertising business to niche sites, and that it should proceed cautiously in its cost cutting to avoid slowing investment in its core platform.

The analyst also noted it appears the controversial Yahoo-Google search advertising partnership is facing opposition from federal antitrust regulators in its current form and, as a result, he is removing $250 million in revenues from his fiscal 2009 forecast relating to the outsourcing agreement.

Analyst Sandeep Aggarwal of Collins Stewart also remains somewhat bearish on the company.

Aggarwal, who maintains a "hold" recommendation, said in a research report:

Though we were impressed with 11 percent RPS lift, arguably not sustainable in a weak economy, and President Decker was largely upbeat on Q4 guidance and Yahoo.com demand, we continue to believe that economic headwinds will affect business. Looking at series of events in past 1 year, i.e. Jerry Yang becoming CEO and announcing his 100 days plan, Microsoft's bidding in January, Yahoo pursuing new investments/strategic alternatives, and now cost cuttings--we continue to believe that the best option to unleash Yahoo's value is to reengage in talks with Microsoft for a search related deal.

Wall Street analyst Jim Friedland of Cowen & Co., meanwhile, offered investors a bit of good news/bad news to chew on. While Yahoo is expected to continue to lose market share in search, its search revenues are expected to grow for the next several years. But come three or four years from now, those search revenues are expected to peak.

Google and Yahoo are household names. But, Sandy Litvack? Not so much.

While Litvack may be obscure to the general public, he is well-known in antitrust circles as a sharp litigator--and one who Yahoo and Google may soon become acquainted with if the Department of Justice challenges the companies' controversial search advertising partnership.

Sandy Litvack in 2004. (Photo credit: Kevin Heslin/Getty Images)

For now, it's unclear whether the scope of the investigation will only focus on the Yahoo-Google deal. Some sources told CNET News that a federal investigation could broaden to examining Google's overall impact on the marketplace.

But there’s little question that bringing in Litvack indicates just how serious federal trustbusters are in their pursuit of Google.

Litvack, a former antitrust chief for the Department of Justice under the Democratic Carter administration, was pulled back into service from private practice litigation by the DOJ earlier this month, in order to serve as a consultant in the antitrust unit of its networks and technology department, according to a DOJ source. This marks Litvack's third pass through the antitrust department, with his first as a trial lawyer fresh out of Georgetown Law Center in 1959.

Given his reputation as a sharp litigator, some former DOJ attorneys say the antitrust staff has likely completed its analysis of the case, and is now seeking Litvack's assistance on whether he could build a case that could be won at trial.

"They're not using Sandy to analyze the facts of the case. They're not asking his opinion whether this is a good thing or a bad thing," said one former DOJ antitrust attorney, who requested anonymity. "They want to know if he thinks he can sell this case in court."

In order to make a complex case simple so that a judge hearing the antitrust case will understand it, the prosecutors will want to simplify it, latching onto issues such as market share that can be understood in a courtroom. That's where someone like Litvack would come in.

"Good litigators can take a complex subject and make it sound simple," the source said.

By most accounts, the Yahoo-Google transaction announced in June is complex. The non-exclusive agreement allows Google to have its ads appear on Yahoo's search pages. Although Yahoo notes it is free to decide where Google's ads will appear and to what extent they will appear, the Internet search pioneer is planning to use Google enough to yield hundreds of millions of dollars.

Yahoo, for example, expects to receive $800 million in revenue from the deal in its first year and another bit of operating cash flow to the tune of $250 million to $450 million in the same period.

It's clear the deal has rankled more than a few. A major advertising trade group on Sunday announced it had sent a letter to the DOJ to protest the proposed transaction.

The advertisers worry the deal would diminish competition, increase concentration of market power, limit choices currently available and, as a result, lead to a rise in advertising prices. Microsoft has also weighed in with its opposition to the search advertising deal, as well as some legislators.

"A bright, seasoned litigator"
While Litvack may lack the high profile of former Microsoft special prosecutor David Boies (who initially was hired as a DOJ consultant and later litigated in the famed Microsoft trial), few question Litvack's skills as a litigator. Before joining the DOJ in 1980, Litvack had worked in private practice as an antitrust litigator for nearly 20 years.

He caught the attention of John Shenefield, who was head of the DOJ's antitrust unit and was being promoted to associate attorney general.

"He was a bright, seasoned litigator with an enthusiastic personality. And at the DOJ, you have either litigators or academic types, and I felt we needed a litigator," Shenefield said in an interview with CNET News.

Litvack brought a nose-to-the-ground sensibility to a department that had historically been dominated by policy-setters and academics.

"During a Christmas party, there was a skit and the person playing Sandy said, 'fundamentally, I'm a litigator' and everyone in the room knew exactly what he meant," said a source who worked for Litvack. "He liked to litigate. He liked the rough and tumble, whereas some people who had served in that position liked to dot all the I's and cross all the T's."

The antitrust unit, while experienced with analyzing cases, is far weaker on preparing a case for litigation and presenting at trial, said former DOJ attorneys. It needed someone like Litvack--and it may still if it goes after Google.

"Just having someone on hand like a Sandy or David Boies shows there is a serious issue there and that the parties need to consider their other options," Shenefield added.

Some of those options can include restructuring an agreement to placate regulators, backing away from a transaction altogether, or bracing for a legal fight. It has yet to be seen whether the DOJ will force the issue and how the companies may respond.

During his time at the DOJ, Litvack inherited the long-running AT&T antitrust case that began in the mid-1970s. Litvack kept the pressure on the telecom giant and supported the trial staff, Shenefield said. A year after Litvack left the DOJ and in the early Reagan administration, a settlement was reached with AT&T that resulted in the break-up of Ma Bell.

Swimming against the tide
But what Litvack was most known for during his time at the DOJ, say former antitrust attorneys, is swimming against the tide in litigating resale price maintenance cases, even though his predecessors chose not to take up the pursuit and some economists considered such action to be "pro-competitive."

The resale price maintenance laws basically found it unlawful for a manufacturer to have an agreement with a reseller that prohibited them from reselling a product at a higher or lower price than expressly stated in the contract.

"Sandy had an attitude that if is it's the law, I'm a prosecutor, I'll go out and prosecute," said a former antitrust DOJ attorney. Ultimately, the U.S. Supreme Court ruled that such activity was considered legal.

"Sandy should have never pursued it. It was a waste of time," said another former DOJ attorney.

Other former DOJ attorneys, however, were less critical of Litvack's pursuit, characterizing his resale price maintenance fixation as an example of his doggedness.

One of the more significant roles Litvack played at the DOJ, which was not widely known, was his advisory role to U.S. Attorney General Ben Civiletti in the handling of President Carter's brother Billy, Shenefield said.

Civiletti was debating whether to take legal action against Billy Carter, who later admitted to receiving a $220,000 loan from the Libyan government and eventually was forced to register as a foreign agent of the Libyan government, in a controversy dubbed "Billygate."

"Ben Civiletti wanted someone to advise him on whether the allegations, in a litigator's mind, made sense and how he would handle it as a matter of public record," Shenefield recalled. "Ben had been a litigator in private practice too and recognized Sandy's common sense."

After leaving the DOJ in 1981, Litvack returned to private practice until joining the Walt Disney Co. in 1991. While at Disney, where he spent eight years, Litvack first served as general counsel, then corporate operations chief, and finally vice chairman before leaving that post in 2000. After Disney, Litvack returned to private practice, before leaving earlier this month to rejoin the DOJ.

So why would a seasoned litigator who is 72 and on the tail-end of his career consider jumping aboard in what may prove to be a rigorous case should the DOJ ultimately pursue it and Yahoo and Google maintain their resolve and fight it?

"He loved his time at the division. It was fun for him," Shenefield said. "This is recess for him and a way to provide public service...other people raise horses."

(Litvack could not be reached for comment, and the DOJ declined to comment on his hiring.)