Yahoo epitomizes California cool; Microsoft is still trying to get over its competition-crushing past. But the culture clash may not be as big a stumbling block to the software giant's rich buyout bid as some critics may think.

Yahoo Inc. is still mulling over Microsoft Corp.'s offer, worth about $42 billion based on Microsoft's closing share price Friday. Even if Yahoo's board and shareholders approve the takeover, U.S. and European antitrust regulators must still sign off.

Google Inc. stirred that pot Sunday with a blog post that called a combined company "troubling" from an antitrust standpoint; Microsoft followed with a statement of its own that the deal would actually improve competition.

Yahoo might appear more laid back, but the two are culturally closer than one might expect. For instance, while Google Inc. foots the bill for employees' meals, Microsoft and Yahoo both make their work forces pay in the cafeteria. And while some associate afternoon soccer and cricket matches with Yahoo's startup ethic, Microsoft's campus is dotted with playing fields.

And their similarities extend far beyond the perks.

"Yahoo is not the sort of strapping startup it was 10 years ago. It's a corporate organization with its own bureaucracies," said Charlene Li, an analyst at Forrester Research.

Microsoft, for its part, has had to tone down its competitive behavior after a decade of antitrust problems. Though its Windows operating system is on more than 90 percent of the world's computers, its perpetual lack of savvy online has also prompted it to experiment with Silicon Valley-style events, including inviting programmers to gather once a month in bean bag chairs to brainstorm and collaborate on cool Web projects.

Ali Diab, co-founder of a startup called Ripple TV, worked for both companies in the past. He said the talk of a culture clash is overblown, and noted similarities between Yahoo co-founders David Filo and Jerry Yang, and Microsoft founder and Chairman, Bill Gates, and its Chief Executive Steve Ballmer.

"David and Jerry, Bill and Steve — they're quite technical, quite astute technologists, and I think the cultures deep down still reflect that at both companies," he said. "Yahoo maybe a little more has a young, adolescent, college-like culture. But it's a third the age of Microsoft."

Diab, who reached the level of general manager when at Microsoft between 1998 and 2002, and vice president status at Yahoo between 2002 and 2006, said he didn't sense animosity toward Yahoo while at Microsoft, or vice versa — just a natural sense of competition.

But in spite of the fact that Yahoo shares its Stanford roots with Google, both cultures harbor a burning desire to beat the search leader.

"It wasn't, 'Yeah, we're just OK with being No. 2'" he said. "We were very much intent on being No. 1 in that market."

The two companies are also not complete strangers to working together. Until Microsoft launched its own ad-serving technology in 2006, it used Overture, a search marketing system Yahoo eventually bought in 2003.

More recently, Yahoo and Microsoft teamed up to make it possible for their respective instant messaging users to chat regardless of which service they were signed on to.

Yahoo has also been one of the only companies to make use of some new features built into the year-old Windows Vista operating system. Yahoo's latest instant messaging program was constructed with Microsoft's answer to Adobe Systems Inc.'s popular Flash, a technology called Silverlight that has otherwise been slow to catch on.

All that doesn't mean Yahoo will meekly agree to be swallowed up by Microsoft, even if the combination gets them part way to their goal of toppling Google.

The $31-a-share bid of cash or Microsoft stock is 62 percent more than Yahoo's closing price yesterday. Before today, Yahoo had dropped 18 percent this year in Nasdaq Stock Market trading, and said this week that fourth-quarter profit fell 23 percent.

Microsoft Chief Executive Officer Steve Ballmer is attempting the biggest-ever technology takeover after failing to compete with Google in a market that may almost double to $80 billion by 2010. Google has grown faster than Microsoft in every quarter since Google's 2004 initial public offering as its search engine won more users.

``Microsoft is under massive pressure to expand its Internet business to fend off competition from rivals such as Google and this deal shows how desperate they are,'' said Thomas Radinger, a fund manager at Pioneer Investments in Munich, which oversees about $95 billion, including Microsoft shares. ``It's a huge gamble as the price is very steep and it will take years to successfully integrate such a massive acquisition.''

Yahoo rose $8.58, or 45 percent, to $27.76 at 10:46 a.m. in Nasdaq trading. Microsoft, based in Redmond, Washington, fell $2.02, or 6.2 percent, to $30.58, while Google dropped 9.5 percent to $510.75.

Cost Savings

Microsoft said the transaction may cut costs by $1 billion annually for the combined company. Yahoo, based in Sunnyvale, California, said it plans to evaluate the proposal ``promptly.''

``This is kind of a gift from heaven for the Yahoo shareholders who have really been suffering for the last couple years,'' said Georges Yared, chief investment strategist for Yared Investment Research in Wayzata, Minnesota. ``This allows the shareholders to be bailed out.''

Yahoo's inability to crack Google's dominance in search has led to eight straight quarters of declining profit and a stock that, before today, had lost half its value in the past two years.

``It shows how serious the threat is from Google,'' Jordan Rohan, an analyst at RBC Capital Markets in New York, said in an interview. ``Yahoo is vulnerable. Investors are losing patience with the Yahoo management team.'' The New York-based analyst rates the stock ``outperform.''

Google yesterday reported a 52 percent increase in fourth- quarter sales growth, its 14th straight quarter exceeding 50 percent. Still, profit and revenue trailed analysts' estimates as it received less money than expected from ad deals with social- networking sites like News Corp.'s MySpace.

Losing Share

Google, based in Mountain View, California, captured 56 percent of U.S. Web queries in December, almost double the combined share for Yahoo and Microsoft, which attracted 18 percent and 13 percent, according to New York-based Nielsen Online. Searches will account for 37 percent of the $27.5 billion U.S. online advertising market in 2008, estimates research firm EMarketer Inc.

Yahoo has also lost sales in the market for graphical, or display, ads to social sites like Facebook Inc. and MySpace. Co- founder Jerry Yang replaced Terry Semel as chief executive officer in June to reignite sales growth. Microsoft increased competition with Google by agreeing to buy a 1.6 percent stake in Facebook, the second-most visited social-networking site.

Before today's stock gain, about half of Yahoo's market value came from its investments in China's Alibaba Group and Alibaba.com, Yahoo Japan and South Korea's Gmarket Inc. The company said this week that the value of those investments was more than $10 a share in the latest quarter.

Yahoo Rejection

Microsoft was advised by Morgan Stanley and Blackstone Group LP. Yahoo hasn't disclosed its bankers. Microsoft and Yahoo explored ways to work together in late 2006 and early 2007, according to a letter Ballmer sent to the Yahoo board. Yahoo rejected the idea of being taken over by Microsoft a year ago, the letter said.

``This combination provides value to advertisers in the form of more scale and more inventory,'' Kevin Johnson, who runs Microsoft's Windows and Internet group, said in an interview. ``It provides value to publishers, in terms of integrating the ad platform.''

Yahoo was founded by Yang and David Filo while the two were graduate students at Stanford University in 1995. The co- founders, who own a combined 9.8 percent of Yahoo's stock, took the company public a year later. After a three-year jump in the stock price, they were each worth $4 billion, according to Forbes Magazine. Then the market crashed in 2000, wiping out 86 percent of Yahoo's market value.

The company said net income for the quarter ended Dec. 31 fell to $206 million, or 15 cents a share, from $269 million, or 19 cents a share, for the same period a year ago. Contributing to the drop were stock-based compensation and other expenses. Operating income for the quarter plunged 38% to $191 million from $308 million a year ago.

Revenues rose 8% to $1.8 billion from $1.7 billion a year ago. Marketing services, which include online advertising sales, rose by 7% to $1.6 billion from $1.5 billion. Revenues from Yahoo's owned-and-operated sites rose by 23%, while sales on affiliate Web sites increased by 13%.

During a conference call with financial analysts, Yahoo chief executive Jerry Yang announced there would be a "realignment" of 1,000 jobs at the company, which had 14,300 employees as of the end of last year. As a result, the company expected to incur a $20 million to $25 million charge. Some employees would be shifted to other jobs, and the company planned to add people in areas deemed as priorities.

Yang told analysts the company was spending money to change its advertising platform and operations, and expected to exit 2008 stronger and more competitive, and return to higher levels of operating cash flow growth next year. "We're not tinkering around the edges," Yang said. "We're making significant and game-changing investments in Yahoo's future."

Yang said the company has made progress and was in position to capture a significant piece of the growing ad market. Yahoo, for example, saw 20% growth year over year in display advertising, which accounts for 40% of the company's revenue.

Growth in online advertising was expected to continue this year, although Yang had said in an earlier statement that the company expected to experience some "headwinds" in the market. A weakening U.S. and global economy could have an impact on the overall advertising market.

The highest growth in ad revenue was expected in the second half of the year when Yahoo rolls out major technical changes it has made in its platform that would increase indexing speeds for search, and improve ad distribution, executives said. Leading Yahoo's technology effort would be Aristotle "Ari" Balogh, 43, who was named Tuesday to the post of chief technology officer. Balogh had been CTO of security company VeriSign.

In its 2008 forecast, Yahoo expected revenues for $5.35 billion to $5.95 billion. The outlook disappointed Wall Street, and Yahoo shares fell more than 10% in after hours trading.

Yahoo also announced that it had renegotiated its contract with AT&T, which was set to expire this spring. The two companies would continue selling Internet access together and partner on content offered through the telephone company's TV service and Web portal.

The Internet pioneer has yet to show any progress against rival Google, which continues to dominate search on the Web and related advertising. Yahoo has long been a distant No. 2 in search, with Microsoft consistently in third place. Many analysts expect Google to continue to dominate the market this year.

Yahoo, however, remains strong in terms of attracting visitors. The portal in December had the largest audience with 136,634 visitors, according to ComScore. Google was second with 132,954, and Microsoft sites third with 120,034.

Nevertheless, Yahoo continues to struggle in the lucrative market for search-related advertising. The company's catch-up mode with Google and anemic stock prices led to chief executive Terry Semel stepping down last June.

Google Inc. has replaced the high-profile attorney leading its defense against a $1 billion lawsuit filed by Viacom Inc.

The lawsuit filed by Viacom in March claims copyright infringement based on the unauthorized appearance of numerous Viacom shows on Google's YouTube video-sharing service.

In May, Google retained Phil Beck, of Bartlit Beck Herman Palenchar & Scott LLP, to lead its defense. Beck is best known for representing George W. Bush in Florida during the 2000 presidential election, and working with the U.S. Department of Justice in its antitrust settlement with Microsoft Corp.

But in a filing in U.S. District Court in New York, Google attorneys requested that Beck and fellow Bartlit Beck attorneys be replaced by attorneys from international firm Mayer Brown LLP.

Google litigation counsel Catherine Lacavera said in a prepared statement that, "We decided to make this change because it appeared that scheduling conflicts might pose problems as we move into the more active stages of discovery."

Lacavera added that, "Mayer Brown has a substantial presence and history practicing law in New York, where the lawsuits are pending."
Making such a move well before a possible trial in the case is not unusual, said Charles Hosch, an intellectual property attorney with Strasburger & Price LLP. "It's certainly not automatically an aspersion or some sort of indication of anything untoward," Hosch said.

Mayer Brown attorney Richard Ben-Veniste, who will be assuming Google's defense as part of the switch, is also a high-profile attorney, best known for his role as Watergate prosecutor in the 1970s, and as a member of the 9/11 Commission.

While retaining Beck was considered a significant move by Google, "retaining Ben-Veniste is a big deal, too," Hosch said.

The European Commission Monday opened two new antitrust investigations against Microsoft Corp. over complaints that the company is continuing to abuse its dominant position through its Office software and its Internet Explorer browser The commission is investigating whether Microsoft has illegally refused to disclose "interoperability information" across a range of products, including its Office suite, hindering rivals from creating compatible products.

The case results from a complaint brought forward by some of Microsoft's main rivals, including International Business Machines Corp. and Oracle Corp. of the U.S., banded together as the European Committee for Interoperable Systems, or ECIS.

The second area in which the commission is investigating Microsoft, is in the field of browsers, where Microsoft is accused of tying its Internet browser Explorer into the Windows operating system in ways that keep competitors from entering the market. The probe follows a complaint by competing browser vendor Opera Software ASA, based in Norway.

The Opera complaint follows the logic of the EU's successful antitrust pursuit of Microsoft. European regulators charged Microsoft with illegally bundling its Media Player software with Windows to box out rivals. They also said Microsoft withheld specifications needed for competitors to make their machines work with Windows. Microsoft received a record fine that could amount to billions of euros.

In September, the software giant said it wouldn't appeal a ruling by a top European Union court that backed sweeping powers for EU antitrust regulators to tackle the abuse of a monopoly position by technology companies. Microsoft's decision not to appeal left that ruling as settled law.

The companies were accused of receiving money from online gambling businesses to advertise illegal betting from 1997 through 2007.

As part of the settlement, the companies will pay cash to the U.S. government and provide millions of dollars worth of public service advertisements informing young adults and teenagers that Internet gambling is illegal.

U.S. Attorney Catherine Hanaway in St. Louis, Missouri, who prosecuted online gambling company BETonSPORTS Plc earlier this year, announced the settlement.

"These sums add to the over $40 million in forfeitures and back taxes this office has already recovered in recent years from operators of these remote-control illegal gambling operations," Hanaway said in a statement.

Microsoft will pay $4.5 million to the U.S. government, $7.5 million to the International Center for Missing and Exploited Children, and provide $9 million worth of public service advertising.

David Bowermaster, a Microsoft spokesman, said that Microsoft stopped accepting ads from online gambling sites nearly four years ago. "This agreement reflects our ongoing commitment to online safety," he said.

Yahoo's settlement of $7.5 million includes forfeiting $3 million to the U.S. government and providing $4.5 million worth of online ads for a public service advertising campaign. Google will pay $3 million, the department said.