Microsoft/Yahoo deal fuels speculation

Proposed merger is worth $44.6bn

Microsoft's proposed $44.6bn (£22.4bn) takeover of Yahoo has fuelled widespread conjecture over the possible fate of both companies.

Inside contacts at Yahoo say the company is considering a business alliance with main rival Google, according to the Reuters news agency.

And the search giant has also made a loud and public protest at the possible union of its rivals. If the Microsoft deal goes ahead, the new company could hold dominant control over all web traffic, according to chief legal officer David Drummond.

"This is about more than simply a financial transaction, one company taking over another," said Drummond.

"It is about preserving the underlying principles of the internet – openness and innovation."

US competition authorities will begin their scrutiny of the deal later this week. The Congress Judiciary Committee will hold its first hearing on Thursday, despite the fact that Yahoo has yet to make a public response to the offer.

Analysts are focusing on the deal's implications for Google's dominance of the advertising market.

"Microsoft has been a third ranking player, behind Google and Yahoo – with Google having a substantial and clear lead," said Ovum senior vice president David Mitchell.

"The combined Microsoft and Yahoo business is still likely to be a much smaller player than Google, although they will have substantially improved their ability to compete."

But even with the added strength of Yahoo, Microsoft will face a challenge in squaring up to Google, according to Gartner vice president Andrew Frank.

"Microsoft likely realises that it is unlikely to ever top Google in advertising and search," said Frank.

"But the company must stay engaged in this area to diversify its revenue and limit Google’s expansion.

"Antitrust laws are also a concern with any deal of this size - and while the current US administration is less likely to pose a problem, in recent years the European Union has aggressively policed similar mergers."