New Line Cinema to merge into Warner Bros.

By Claudia Eller, Los Angeles Times Staff Writer

The consolidation marks the end of the line for the once scrappy producer that prided itself on taking creative risks that other studios wouldn't. But in recent years New Line strayed from its street-smart roots with a slew of costly flops that ended its role as a big-time player in the volatile movie business. In a sign of retrenchment
that is increasingly prevalent in Hollywood, the company will now focus on making fewer movies limited to the kind of smaller, low-cost "genre" horror and comedy pictures upon which it built its name. New Line becomes the latest free-standing Hollywood studio to abandon its ambitions as a full-fledged company in a market in which bloated overhead and soaring production and marketing costs have squeezed profits amid flat movie attendance and sagging DVD sales. It comes just as the studio is to release today what could be one of its most promising comedies in a long time, the basketball spoof "Semi-Pro" starring Will Ferrell.

Over the last three years, DreamWorks SKG, the once highflying live-action studio founded by Steven Spielberg, David Geffen and Jeffrey Katzenberg, was sold to Viacom Inc. and scaled back as part of the media company's Paramount Pictures. At the same time, Harvey and Bob Weinstein's Miramax Films became a much smaller unit of owner Walt Disney Co. after the brothers were forced out. Metro-Goldwyn-Mayer was gobbled up by a consortium of investors including Sony Pictures, Comcast Corp. and two major private equity firms. "People start out with high hopes for these indie studios," media analyst Harold Vogel said. "But ultimately they encounter rising costs and difficulties in managing the businesses. At some point, the cash flow and balance sheets fall short of their ambitions."

The consolidation of New Line is the first corporate maneuver by Time Warner Inc.'s recently named Chief Executive Jeffrey Bewkes to rein in costs at the New York media giant, whose stock price has stagnated since its merger with America Online eight years ago. Bewkes is under pressure from shareholders to boost profitability at Time Warner, which owns cable channels such as CNN and HBO; cable systems that are the largest in Southern California; and publishing operations that include Time, Sports Illustrated and People magazines. In a conference call with media analysts this month, Bewkes announced plans to immediately eliminate 100 jobs at Time Warner's corporate headquarters, split AOL into two parts, possibly reduce its 84% ownership of Time Warner Cable and target New Line for "near-term cost cuts." That was an understatement. As a part of Warner Bros., New Line's staff of 600 will be vastly scaled back and the company will no longer greenlight, market or distribute its own movies. Although New Line executives will continue to oversee the development and production of its own films, final say on all matters rests with Warner Bros. President Alan Horn. New Line will make only half the 12 to 14 pictures a year it did previously, which will now be distributed worldwide by Warner Bros. Bewkes will meet today with New Line's New York employees and address its Los Angeles staff via satellite at the Pacific Design Center.

"Between the cost savings and the revenue enhancements, we believe we can at least double the earnings of New Line," Bewkes said in an interview. He added that those gains would more than offset "substantial restructuring charges" that Time Warner would incur as a result of New Line's consolidation and would benefit earnings as soon as next year.

"This is a no-brainer move," said Richard Greenfield, an analyst with Pali Research. "There's no reason to have two separate infrastructures." New Line's diminished star is a huge blow for New Line founder, Bob Shaye, 68, and his longtime top lieutenant, co-Chairman and co-Chief Executive Michael Lynne, 66, both of whom learned Thursday that they would leave the company. No successor was named. In recent weeks, the pair, whose contracts expire at the end of the year, made a last-ditch attempt to stay, presenting Time Warner management with a plan that would have ensured their continued employment. In an e-mail to employees, Shaye said their departure was a "painful decision, because we love New Line and the people who work here have been like our second families." Shaye, who founded New Line in his Greenwich Village apartment in 1967 by peddling "Reefer Madness" to college campuses, continued to reign over the company even after he sold it to media magnate Ted Turner in 1994. Two years later the company was swept up in Time Warner's purchase of Turner's cable empire. Over the next 12 years, Shaye continued to run New Line as a fiefdom.

But his and Lynne's relationship with their corporate parent grew strained as New Line began making costlier mainstream movies in the mid-1990s, including Warren Beatty's "Town and Country," "Little Nicky" with Adam Sandler and "The Island of Dr. Moreau," starring Marlon Brando. Such misfires prompted Time Warner to exercise more scrutiny. In 1997, Time Warner considered selling New Line but was resisted by Shaye's ally Turner, who as vice chairman and a major shareholder held a lot of sway. A couple of years later, Shaye made an audacious bet that changed the course of New Line's fortunes -- at least temporarily. He committed hundreds of millions of dollars to making three "Lord of the Rings" movies after New Zealand director Peter Jackson's idea to bring the literary classic to the screen was rejected by other major studios.

The first "Rings" movie grossed $871 million worldwide, followed by a two sequels that amassed more than $2 billion in ticket sales. That was a tough act to follow. Although all studios have ups and downs, New Line's poor track record in recent years added to the pressures on Shaye and Lynne. Since the last "Rings" film in 2003, the studio has had some hits -- "The Wedding Crashers," "Elf" and last year's "Hairspray." But the hits were outnumbered by flops such as "The Last Mimzy," a family sci-fi fantasy directed by Shaye himself; "Rendition," a thriller with Reese Witherspoon; and "The Number 23," a dark thriller starring Jim Carrey. Its biggest miscalculation came in December with a failed attempt to launch a new movie franchise based on Philip Pullman's literary trilogy "His Dark Materials." New Line spent at least $180 million to produce and tens of millions more to market the first film, "The Golden Compass," which only managed $70 million in domestic ticket sales.

Although the movie grossed more than $250 million overseas, New Line had sold off the foreign rights to offset its high budget. But that longtime practice of the company to hedge its bets runs counter to Warner's strategy to retain worldwide distribution rights. "International revenues are becoming more important and it doesn't make sense to give up foreign rights, where a lot of the upside is," Bewkes said. The Burbank studio will now also be able to exploit New Line's valuable library of about 500 titles, including "Teenage Mutant Ninja Turtles," "The Texas Chainsaw Massacre," David Fincher's thriller "Seven," and the Jim Carrey comedies "The Mask" and "Dumb and Dumber." But the jewel in the crown is a planned adaptation of "The Hobbit," J.R.R. Tolkien's predecessor novel to the "Lord of the Rings" trilogy. The project was in abeyance until New Line and Jackson settled a lawsuit in December over the accounting of the first film's income. That paves the way for Jackson to co-executive produce "The Hobbit," which MGM will co-finance and release internationally. But New Line's legal troubles are far from over. Tolkien's trust is suing the studio for allegedly cheating it out of at least $150 million in profit from the franchise. On a more promising note, New Line has several potential hits in the wings, including a movie version of HBO's popular series "Sex and the City," a screen adaptation of Cornelia Funke's fantasy novel "Inkheart" and "Journey 3-D," based on Jules Verne's classic "Journey to the Center of the Earth," starring Brendan Fraser.

Ambac bail-out fears dent Wall Street

By Stacy-Marie Ishmael in New York (Financial Times)

US equity markets opened lower on Friday, setting the stage for a fourth consecutive month of declines, after reports that the proposed rescue of bond insurer Ambac was at risk and record losses at AIG. The S&P 500 fell 1.2 per cent to 1,351.99 in early trade, while the Dow Jones industrial average fell 1.1 per cent to 12,445.74. The Nasdaq composite traded 0.9 per cent lower at 2,309.79. The Short View: Brazil’s bull run - Feb-28 CNBC said the Ambac bail-out had hit a “significant snag” over the amount of capital the consortium of banks are willing to put up. Ambac’s shares fell 5.7 per cent to $11.13; CNBC said the deal was “far from dead.” Ambac’s rival MBIA fell 4.1 per cent to $13.48 after the bond insurer said it could incur claims payments amounting to a “significant portion” of its reserves. Elsewhere in the insurance sector, Assured Guaranty’s shares soared 14.2 per cent to $26.01 after Wilbur Ross agreed to buy up to $1bn in shares of the triple-A rated bond insurer. But AIG fell 5.9 per cent to $47.18 after the world’s largest insurer posted a fourth-quarter net loss of $5.3bn due to $11.5bn in writedowns on its derivatives portfolio. A report from UBS that credit-market losses at financial firms might top $600bn added to the jitters around financial stocks, which have sold-off sharply this week. “Leveraged risk positions are a cancer in this market and the sooner it is treated the better,’’ UBS strategist Geraud Charpin wrote in a note to clients on Friday. AIG’s $11.5bn writedown “is also the clearest indication that banks are not the only ones to suffer potential losses,” he said. An index of financial stocks fell 2.2 per cent, while an investment banking index declined 1.7 per cent. But there was good news for technology, media and telecommunications companies. Technology consulting company Sapient rose 15.9 per cent to $7.23 after its first quarter sales would exceed analysts’ estimates. Novell rose 4.1 per cent to $6.88 after the Linux software distributor reported a fiscal first-quarter profit that beat estimates. Video game publisher Take-Two Software rose 1.5 per cent to $26.40 after it said had received “informal indications of interest” from other potential bidders following Electronic Arts’ unsolicited $2bn takeover offer for the company earlier this week. The company added that it had not received any written offers and was not in any discussions for a buyout with any party, including EA, according to a filing with the Securities and Exchanges Commission. 3Com leapt 19.6 per cent to $3.48 after the Wall Street Journal said Bain Capital and Huawei Technologies planned to reapply for approval to acquire the networking systems and services provider in a deal worth $2.2bn. On the economic front, data showed US personal income and personal spending in January rose more than expected, but inflation ate up a bigger portion of these as a key price index also rose. In the bond market, yields on the 2-year Treasury note fell 17 basis points 1.7 per cent. The 10-year Treasury note fell 12bp to 3.60 per cent.

HSBC Gets $3.2 Billion Bid for French Regional Units

HSBC Gets $3.2 Billion Bid for French Regional Units

Feb. 29 (Bloomberg) -- HSBC Holdings Plc, Europe's biggest bank by market value, may sell its French regional consumer- banking network to Banque Federale des Banques Populaires for 2.1 billion euros ($3.2 billion) as it focuses on faster growth in French cities and emerging markets. HSBC is in exclusive talks and has got a ``firm'' cash offer for what would be its biggest sale ever, the London-based bank said today in a statement. The price is 21 times the units' after-tax earnings last year and 3.7 times shareholders' equity on Dec. 31, HSBC said. The 400 branches generated less than 20 percent of French pretax profit last year. The London-based bank aims to earn 60 percent of pretax profit from emerging markets, up from about 50 percent in the first half of 2007. In the U.S., it has cut lending, closed mortgage units and changed management to curtail bad debts from subprime consumers. It may need to add $13 billion to provisions, Goldman Sachs Group Inc. analysts wrote last month. The French sale ``is logical, it is consistent with their strategy,'' said Derek Chambers, an analyst at Standard & Poor's Equity Research Ltd. in London who has a ``hold'' rating on the stock. ``The real challenge is to sort out the U.S.'' The regional banks are Societe Marseillaise de Credit; Banque de Savoie; Banque Chaix; Banque Marze; Banque Dupuy, de Parseval; Banque Pelletier; and Credit Commercial du Sud-Ouest, the company said. They had assets worth 8.38 billion as of Dec. 31 and generated net income of 100 million euros last year. They have 400 branches and 2,950 people.

`Faster Growing Businesses'

``This offer is an opportunity for HSBC to redeploy capital to other investments as we pursue our strategy and rebalance our activities towards emerging markets and faster growing business segments,'' HSBC Chairman Stephen Green said in the statement. There are still ``significant opportunities'' for banking in urban France through HSBC's international network, Green said. HSBC fell 1.8 percent to 766 pence in London trading as of 1:40 p.m. The company is down 9.1 percent this year, valuing it at 90.8 billion pounds ($179 billion). Banque Federale des Banques Populaires is the central coordinating unit of Groupe Banque Populaire, a network of regional lenders that isn't traded. ``This acquisition allows Groupe Banque Populaire to improve its growth prospects in retail banking,'' Banque Populaire Chairman Philippe Dupont said in the statement. ``We intend to retain the brands of the regional banks and their individual identities.''HSBC reports full-year earnings on March 3. It plans to complete its $6.45 billion acquisition of Korea Exchange Bank from U.S. buyout firm Lone Star Funds in April.

Sprint Returns A Shot in the Battle of the Bundle

By Saul Hansell (New York Times)

What do you do when you just lost nearly $30 billion and customers are fleeing? How about slashing prices to win back business? Sprint Thursday, as expected, introduced its version of an unlimited use wireless plan. Called “Simply Everything,” the plan is at the same $99 price point plans introduced by Verizon, AT&T and T-Mobile. But Sprint includes everything: voice, messages, data, G.P.S. and TV broadcasts. Verizon, for example, charges $139 for the same package. Daniel R. Hesse, Sprint’s new chief executive, told investors in the conference call that the unlimited plan will not be anywhere near enough to stem Sprint’s losses of customers, according to Silicon Alley Insider’s write up of the call. Fewer than 10 percent of wireless customers are in the market for plans that expensive, he said. But the high-end customers are worth fighting for. More interesting will be whether Sprint takes the price war to the mainstream. Mr. Hesse said the company would also introduce an $89 unlimited voice plan with fewer features. And it will streamline its cheaper plans, seemingly lowering the prices for bundles of voice and data services. For now the leading companies are saying they won’t need to cut prices. Dennis F. Strigl, Verizon’s president, told CNBC earlier this week that its unlimited plan “isn’t about launching a price war.” And he dismissed the prospect of further price cuts from Sprint:

What Sprint may go after is not our market. Our market is the customer who wants the high-quality network, good customers service and the dependability of a bill that they know will be about the same every month. So if Sprint goes after the low-end market, that’s not what we’re focused on.

Of course, that is what you would expect him to say. My guess is that the average price for the wireless plans may not fall. But customers will see fewer add-on charges for text messages and other services as the battle of the bundle escalates.

Alcoa to fight Bahrain allegations (Pittsburgh Business Times)

Alcoa Inc., accused of overcharging and fraud by a company controlled by the Persian Gulf state of Bahrain, said it is unaware of wrongdoing and will "vigorously defend" itself in a lawsuit. The lawsuit was filed in federal court in Pittsburgh by Aluminum Bahrain BSC, the Wall Street Journal reported in its Thursday edition. According to the suit, Aluminum Bahrain alleged that New York-based Alcoa (NYSE:AA) steered payments for an aluminum precursor ingredient to a group of companies abroad in order to pay kickbacks to a Bahrani government official. The firm also alleged that Alcoa had overcharged it for the precursor material, alumina. Alcoa spokesman Kevin Lowery said the suit was filed late Wednesday, "so we have not had an opportunity to completely review the allegations. "However, we are completely unaware of any wrongdoing by any Alcoa employees or representatives," Lowery said. But, Lowery said, Aluminum Bahrain contacted Alcoa two weeks ago. "They gave us two weeks to investigate the claims and to settle. That's not enough time to do any serious work. In that time frame, we did a fast review and haven't found anything that deviates from our normal practices. We offered (Aluminum Bahrain) an opportunity to do a full review of the last 20 years, but obviously they chose to immediately file a lawsuit instead. "We will vigorously defend ourselves in the matter. We have a strong commitment to compliance and don't tolerate any improper conduct by any employee," he said. Attorney Mark J. MacDougall of Akin, Gump, Strauss, Hauer & Feld, which represents the Bahraini manufacturing firm, could not immediately be reached for comment.

Fannie Mae Has $3.55 Billion Fourth-Quarter Loss

By James Tyson

Feb. 27 (Bloomberg) -- Fannie Mae, the largest source of money for U.S. home loans, posted a $3.55 billion fourth-quarter loss and said the slump will continue through this year as rising foreclosures send credit costs soaring. The net loss was wider than analysts anticipated, sending the shares down 6 percent in early New York trading. The loss included a $3.2 billion drop in the value of derivative contracts and $2.9 billion in credit expenses, the Washington-based company said today in a Securities and Exchange Commission filing. ``We are working through the toughest housing and mortgage markets in a generation,'' Fannie Mae Chief Executive Officer Daniel Mudd said in an accompanying statement. Homeowners falling behind on their loan payments and an economy teetering near recession are reducing the value of the $2.3 trillion of mortgages the government-chartered company owns or guarantees. The slump may force Fannie Mae, which sold preferred stock in December to bolster capital, to raise more money, said Paul Miller, an analyst at Friedman Billings Ramsey & Co. in Arlington, Virginia. Fannie Mae ``will continue to have trouble with both credit losses and capital levels,'' said Miller, who on Feb. 25 downgraded the stock to ``underperform.'' Credit impairments will exceed company estimates and ``the Street's expectations.'' The company, which accounts for at least one in five home loans, has lost more than half its market value in the past year as the housing slump deepened. Analysts at Goldman Sachs Group Inc. and Merrill Lynch & Co. cut their recommendations to ``sell'' in the past week on concern that falling home prices will restrict earnings.

Loan Losses

Fannie Mae fell $1.30, or 4.6 percent, to $26.97 yesterday in New York Stock Exchange composite trading. The shares dropped to as low as $25.10 in early trading today. Freddie Mac, which ranks second to Fannie Mae, dropped 97 cents to $25.21 yesterday and is down more than 61 percent in the past year. The net loss amounted to $3.80 share, compared with profit of $604 million, or 49 cents, a year earlier, Fannie Mae said. Excluding some items, the per-share loss was $3.79, compared with the $1.20 average estimate of 12 analysts in a Bloomberg survey.

Fannie Mae's loan loss ratio was 9 basis points in 2007, up from 0.3 basis points at the end of 2006. Miller says credit losses will rise to a range of 15 basis points to 25 basis points this year and in 2009. Howard Shapiro, an analyst at Fox-Pitt Kelton Cochran Caronia Waller in New York, forecasts a range of 11 basis points to 14 basis points. A basis point is 0.01 percentage point. Freddie Mac is scheduled to report tomorrow. The McLean, Virginia-based company had losses of $2.02 billion in the third- quarter and $480 million in the year-earlier fourth quarter.

Timely Earnings

Fannie Mae, by reporting timely audited financial results for the first time since 2004, met conditions for the removal of a federal limit on its $724 billion in mortgage investments imposed after a $6.3 billion overstatement of earnings. Its portfolio of home loans and mortgage-backed securities is one of its two main sources of profit. Still, the need to bolster capital against the worsening housing market will inhibit growth this year, Miller said. Fannie Mae sold its preferred shares in December after its third-quarter loss of $1.4 billion. ``For me to get very comfortable in recommending this stock, I'd like to see something above $15 billion in capital raising,'' Miller said. Fannie Mae needs to complete the final items on a list of 81 changes in accounting, internal controls and governance in order to shed a requirement that it set aside 30 percent more reserve capital than normal, the company's regulator told a Senate committee on Feb. 8.

Credit-Default Swaps

The cost of protecting Fannie Mae bonds from default have doubled this year. Credit-default swaps tied to the bonds rose 8 basis points to 87 basis points today, according to broker Phoenix Partners Group in New York. A basis point on a credit-default swap contract protecting $10 million of debt for five years is equivalent to $1,000 a year. Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt. They pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. Congress created Fannie Mae and Freddie Mac to increase mortgage financing by buying loans from lenders. The publicly traded companies profit by holding mortgages and mortgage bonds as investments and by charging a fee to guarantee and package loans as securities. They record losses when defaults rise.

Foreclosures Rise

Derivatives are financial instruments derived from stocks, bonds, loans, currencies and commodities, or linked to specific events like changes in the weather or interest rates. Fannie Mae and other companies use derivatives to hedge against losses on assets and investments including home loans and mortgage bonds. Bank seizures of U.S. homes almost rose 90 percent to 45,327 last month from the same period a year ago, according to RealtyTrac Inc., a seller of foreclosure statistics that has a database of more than 1 million properties. Total foreclosure filings, which include default and auction notices as well as bank seizures, increased 57 percent. More than 233,000 properties were in some stage of default last month, RealtyTrac said in a statement. The foreclosures are plunging the housing industry deeper into recession by pushing more houses onto a market where existing home sales are now at the lowest level since records began nine years ago and prices are dropping. There's a 10-month supply of unsold homes, the highest in at least eight years. Senate Banking Committee Chairman Christopher Dodd and other lawmakers have urged the Bush administration for more than seven months to ease constraints on Fannie Mae and Freddie Mac to help revive the housing market. ``The restrictions imposed on Freddie and Fannie have a direct impact on their flexibility to assist the struggling housing markets,'' Senator Charles Schumer, a Democrat from New York, said in a Feb. 25 letter to James Lockhart, the director of the Office of Federal Housing Enterprise Oversight.

The Ben Bernanke Show

Brian Wingfield (Forbes)

Federal Reserve Chairman Ben Bernanke spends so much time testifying before Congress these days, it might seem he barely has time for his day job as the central bank's top regulator. Wednesday, Bernanke heads back to Capitol Hill, where he'll give his mandatory, semi-annual report on monetary policy to the House Financial Services Committee. He'll repeat those remarks to the Senate Banking Committee on Thursday. They'll be the 12th and 13th times he's faced Congressional panels since January 2007. In all probability, he'll parrot much of what he has said in the three appearances he's made on the Hill since September: The economy is growing more slowly than usual, it will rebound later this year, recession isn't likely, more rate cuts are possible, inflation remains a concern, etc., etc. Tedious? Absolutely. But lawmakers can't seem to get enough of Bernanke. So far this year, he's appeared before the Senate Banking Committee and the House Budget Committee for routine oversight hearings. Committee chairmen are well aware that Bernanke is a big draw, especially in an election year, when the economy is ailing. Of course, every time he's speaks publicly, he might hint at a further rate cut. Rep. Paul Ryan, Wisc., the top Republican on the House Budget Committee, says that when a Fed chairman testifies before his committee in early January, he is simply trying to get a better understanding of how the Fed is deriving its monetary policy decisions. Allan Meltzer, a professor of political economy at Carnegie Mellon University who has written a history of the Federal Reserve, says it doesn't necessarily sully Bernanke's reputation to repeat the same mantra every time he visits the Hill. "What will hurt him is the fact that he's not saying things like 'I have to watch both inflation and the unemployment rate,'" he adds. And surprising as it may seem, Bernanke actually appears before Congress less than his predecessor Alan Greenspan did. Not counting his re-nomination hearings, Greenspan testified an average of more than 10 times per year between 2000 and 2005. In 2005, his last year at the central bank's helm, Greenspan saw a Congressional panel 12 times. The year before that, he was there 11 times. Bernanke, by contrast, appeared before lawmakers 9 times in 2007 and 6 times in 2006.

The figures for both men include the Fed chairman's semi-annual reports to Congress, which account for four separate hearings each year (two each for the House and Senate). In addition to the House Financial Services and Senate Banking Committees, where the semi-annual remarks are delivered, Fed chairmen often face the Joint Economic Committee and the budget panels of both chambers. Every one of Bernanke's appearances before Congress has focused on the general economic outlook, the subprime mortgage mess or fiscal challenges for the United States--often a combination the three issues. No surprise there, given the state of the economy in recent months. Congress summoned Greenspan for his wisdom on a range of topics outside the overall health of the U.S. economy. Examples: China's exchange-rate policy (June 2005), education (March 2004), the nation's natural-gas supply (twice--in June 2003 and again the next month), the aging global population (also 2003), U.S. trade policy (April 2001) and commodity futures trading (June 2000). "What Greenspan did was somewhat on the unusual side," says Meltzer. "He had a view and he wanted it to be heard." Bernanke, on the other hand, has deliberately stayed relatively far from the policy debate.

Markets generally don’t like the Fed chairman’s remarks. On the dates coinciding with Bernanke’s four most recent appearances before Congressional panels, the Dow Jones industrial average closed slightly down. The most severe example was on Jan. 17, 2008, when it closed at 12,159.21 from an opening of 12,467.05--a 2.5% slide. During his semi-annual testimony on July 19, 2007, the Dow closed just half a percentage point higher. The day before, down 0.2%. The Wall Street barometer treated Greenspan in much the same way. On the day of his final testimony as Fed chairman, the market closed up 0.5%. During his last semi-annual address, it ended the first day of testimony up 0.6%, the second day down 0.5%. But a month earlier, when Greenspan addressed the Senate Finance Committee on China’s exchange rate, the Dow dropped 1.6%, from 10,587.09 at the start of the day to a close of 10,421.44. Nonetheless, markets and policymakers will be paying close attention to what he says this week. During his semi-annual report last July, Bernanke made this pronouncement: "Overall, the U.S. economy appears likely to expand at a moderate pace over the second half of 2007, with growth then strengthening a bit in 2008 to a rate close to the economy's underlying trend."

"Moderate" growth isn't exactly what happened. The economy grew at a 4.9% rate during the third quarter of 2007 before dropping sharply to 0.6% growth for the final three months of the year. Amid a deluge of economic data to be released this week are revised figures for growth in the fourth quarter, due out Thursday. If the update is worse than the previous estimate and the economy continues to falter, expect the Ben Bernanke Show to become a running feature this year on Capitol Hill.

Ahead of the Bell: Senate's Mortgage Fix

AP - WASHINGTON

The Senate could begin debating Tuesday another round of remedies for homeowners caught in the worsening housing crisis. Senators may vote this week on a package of legislative proposals, designed by Democrats, that includes easing bankruptcy rules and boosting funds for foreclosure-prevention counseling. The proposed revision to the U.S. bankruptcy code would allow judges to cut interest rates and reduce what's owed on troubled borrowers' mortgages. At stake are potentially millions of dollars of profits for mortgage lenders, which have been lobbying against the measure. Their opposition is echoed by many Republican lawmakers. Consumer advocates, meanwhile, are pushing senators to approve the change. Currently, lenders can foreclose against a homeowner in default on a primary residence 90 days after a bankruptcy filing, and judges have no authority to order changes in mortgage terms.

The Mortgage Bankers Association has said the proposal would hurt more borrowers in the long run by requiring "higher interest rates and larger down payments to offset the risk" of bankruptcy court intervention for some homeowners. The measure is expected to face tougher resistance than the recently approved economic stimulus package, which narrowly touched on the mortgage crisis. Democratic backers consider the new legislation a way to make up for shortcomings in the Bush administration plan to freeze interest rates on a relatively small percentage of loans made to high-risk borrowers.

Monday brought more evidence of the housing sector's ills. The National Association of Realtors reported that sales of existing homes fell to the lowest level in nearly a decade in January while the median price for a home dropped for the fifth straight month. "Today's dismal housing news reinforces the need for congressional Republicans to join Democrats to address the bulls-eye of our economic troubles by passing a housing recovery package this week," said Sen. Charles Schumer, D-N.Y. "The housing crisis has mushroomed in part due to Washington's inaction, and declining home values cut to the very heart of families' sense of financial security and our economy's overall health." Also included in the Senate package is a measure mandating $200 million for foreclosure-prevention counseling services -- a near doubling of funds already committed by Congress -- and an allowance for states to issue more tax-exempt bonds so that housing agencies could help homeowners refinance high-cost mortgages.

GTx Surges on Late-Stage Trial Results (The Street)

Shares of GTx(GTXI) soared nearly 50% Monday after the biopharmaceutical company said its Acapodene drug showed success in a late-stage study in reducing side effects from certain prostate cancer treatments. The Memphis, Tenn.-based company's shares recently were up $6.21, or 48%, to $19.10. The phase III trial looked at Acapodene in patients receiving androgen deprivation therapy, a common first line treatment for advanced prostate cancer patients. Acapodene, or toremifene citrate 80 mg, is designed to fight the side effects of the hormone therapy, such as loss of bone density, fractures and increased cholesterol and heart attack risk. GTx said the drug reduced vertebral fractures by 50% in patients who were given at least one dose of the drug or placebo and who had at least one evaluable study radiograph. There was a 5% rate of these fractures in the placebo group. Of those who were more than 80% compliant with the treatment, the drug reduced the fractures by 61%. GTx said Acapodene also resulted in a statistically significant increase in bone mineral density. It also showed a statistically significant decrease in LDL, or "bad," cholesterol, and an increase in HDL, or "good" cholesterol, among other things. The company said the drug had a favorable safety profile and was well tolerated. Based on the results, it will file a new drug application for Acapodene by this summer. GTx licensed the rights to toremifene citrate from Finnish drug company Orion for all indications worldwide, except breast cancer outside the U.S. GTx also has a development and collaboration agreement with French specialty pharmaceutical company Ipsen in Europe. Ipsen is responsible for filing the drug for regulatory approval in Europe, but GTx will seek its approval and commercialize it in the U.S. GTx also markets Fareston, a treatment for metastatic breast cancer in postmenopausal women.

U.S. Stocks Fall, Led by Financials; Fannie Mae, Goldman Drop

By Michael Patterson

Feb. 22 (Bloomberg) -- U.S. stocks fell for a second day, led by financial shares, on concern that profits at brokerage firms will decline and dropping demand for mortgages will curb growth at Fannie Mae and Freddie Mac. Goldman Sachs Group Inc. and Lehman Brothers Holdings Inc. slumped after Sanford C. Bernstein & Co. analyst Brad Hintz slashed his first-quarter profit estimates by more than 40 percent. Fannie Mae and Freddie Mac, the largest sources of money for U.S. home loans, tumbled after Merrill Lynch & Co.'s Kenneth Bruce said the worst housing market in a quarter century will stifle earnings through 2011. The Standard & Poor's 500 Index retreated 8.4 points, or 0.6 percent, to 1,334.13 at 11:55 a.m. in New York. The Dow Jones Industrial Average slid 77.42, or 0.6 percent, to 12,206.88. The Nasdaq Composite Index decreased 22.83, or 1 percent, to 2,276.95. More than two stocks declined for every one that rose on the New York Stock Exchange. Shares in Asia and Europe also fell. ``People are coming to grips with what is the degree of financial issues,'' David Darst, the New York-based chief investment strategist at Morgan Stanley Global Wealth Management, which oversees $734 billion, said in a Bloomberg Television interview. ``We think caution is called for.'' The S&P 500 has lost 1.1 percent this week and is down 9.1 percent in 2008 after a worse-than-forecast manufacturing report yesterday added to evidence that the economy is falling into a recession. The world's largest banks and securities firms have reported about $160 billion of credit losses and asset writedowns since the beginning of 2007 as the collapse in subprime mortgages spreads across debt markets.

Weekly Declines

Financial shares in the S&P 500 lost 1.2 percent today, bringing their decline over the past year to 30 percent, the worst performance among 10 industries. The 92-member S&P 500 Financials Index is still 3.5 percent above its four-year low on Jan. 18, buoyed by the Federal Reserve's fastest easing of monetary policy since 1990. Goldman, the biggest U.S. securities firm by market value, dropped $1.11 to $174.06. Lehman Brothers fell 95 cents to $53.19. Hintz said slumping credit markets, combined with weak revenue from underwriting and advisory fees, will hurt profits this quarter. Fannie Mae declined $1.24 to $27.75 today. Freddie Mac fell $2.24 to $25.51. Bruce downgraded the shares to ``sell'' from ``neutral.''

`More Pain'

``We do not think the stocks fully reflect the severity or duration of the financial headwinds facing the companies,'' he wrote in a research note to clients dated today. There is ``more pain than gain.'' Intuit Inc. lost $3.60 to $26.19. The world's largest maker of tax-preparation software lowered its third-quarter profit forecast to between $1.31 and $1.34 a share. Analysts predicted profit of $1.37, according to the average in a Bloomberg survey. Express Scripts Inc. gained $1.95 to $66.71. The third- largest U.S. manager of drug benefits raised its 2008 earnings forecast and reported profit that beat analysts' estimates as clients used a higher proportion of cheaper generic medicines. Eli Lilly & Co. added 38 cents to $50.20. The drugmaker said its experimental blood-thinning drug prasugrel will get a priority review by U.S. regulators. With no major economic reports due today, investors will look to next week for further clues on the economy. A report on Feb. 25 will probably show existing home sales declined in January, while a release on Feb. 27 is likely to show a drop in durable goods orders for the same month, according to economists' estimates compiled by Bloomberg News.

Next up: Amazon sides with Blu-ray

Posted by Caroline McCarthy (CNET)

On Wednesday, online retailer Amazon.com became the latest to declare its support for the victorious high-definition technology, announcing that it "will more prominently promote Blu-ray hardware and software products on its Web site." The company will not, however, discontinue its sales of HD DVD products. "The high-definition landscape is rapidly changing, and consumers are looking for guidance on how to make the best high-definition buying decisions," Peter Faricy, Amazon's vice president of movies and music, said in a statement from the company. "Our customers have clearly voiced their support for the Blu-ray format." But in a sense, Amazon is also an indicator that Blu-ray's struggles aren't quite over. With its Unbox movie download service, Amazon is among a number of major Web retailers that offer digital downloads of movies and TV shows. Some have said that with all the bickering over HD DVD and Blu-ray for so many months, digital downloads from companies like Amazon, Netflix, and Apple's iTunes were able to find a steadier footing. Luckily for Blu-ray overlord Sony, your average digital movie download isn't nearly up to par in the quality department.

Antitrust Fears Few in Airline Deal

By SUSAN CAREY (Wall Street Journal)

A merger between Delta Air Lines Inc. and Northwest Airlines Corp. -- which could be announced as early as this week -- has less to fear from antitrust enforcers than past aviation deals, unless regulators grow uncharacteristically squeamish about the combination's sheer size. If the airlines can reach an accord with their unionized pilots and hammer out the final details of a deal to create the world's largest carrier by traffic, the U.S. Department of Justice will be the ultimate judge of whether the merger can proceed. The department, which would be likely to review the case before a new administration arrives in Washington in January, has been kind in the past to deals like this one that don't involve a lot of overlap. A transaction -- as well as any airline mergers that could follow a Delta-Northwest deal -- is certain to face political opposition from some members of Congress, and could run into turbulence with Northwest's other labor unions. Delta's pilots are its only major union. Rep. James Oberstar, a Minnesota Democrat who is chairman of the House Transportation and Infrastructure Committee, has warned that he will oppose big airline mergers. "We can't stop a merger ourselves," said Jim Berard, spokesman for the House committee. "But we can make a lot of noise." AFL-CIO union leaders met in Washington last week to develop strategies on possible mergers, and issued a statement saying they were "united in our commitment to protect airline employees from the severe harm that may stem from poorly conceived airline consolidations that ignore the needs of employees and the flying public." In assessing proposed airline mergers, the Justice Department reviews nonstop and connecting routes between cities where the two carriers overlap, as well as whether their respective hubs are close enough to make them dominant in a region. The department also weighs the likelihood of rivals starting service within two years on city-pairs where the merged airline would have increased market power, potentially reining in the new carrier's ability to raise prices.

Delta, the world's No. 3 airline by traffic, has a big market share in the Southeastern U.S., in New York, and on trans-Atlantic routes. Northwest, which is ranked sixth globally and fifth in the U.S., is strong in the upper Midwest and on trans-Pacific routes. "There isn't that much overlap between Northwest and Delta," said Andrew Steinberg, a former airline antitrust lawyer who recently stepped down as the Department of Transportation's assistant secretary for aviation and international affairs. If another airline merger is proposed soon, that doesn't mean the regulators will automatically reject the first, he said. "They analyze each transaction separately." The last time the Justice Department shot down a big merger proposal was in 2001, when it identified competitive problems in the proposed combination of UAL Corp.'s United Airlines and US Airways Group Inc. At the time, the government found the two were the only significant providers of nonstop flights from Washington, D.C., to a number of cities, were the most significant carriers on a number of nonstop routes between their hubs, and would have had undue concentration along the East Coast. The department in 2005 approved a merger of US Airways and America West Airlines, whose operations had little duplication. Delta and Northwest see their proposed marriage as a merger with little overlap domestically and none on overseas routes, said people familiar with the matter. The two also don't anticipate reducing a lot of capacity, shuttering existing hubs or laying off many front-line workers.

In the past, Justice Department officials have said that if a merger brings cost and operational efficiencies, regulators could perceive those benefits as outweighing a merger's anticompetitive impact. Diana Moss, vice president of the nonprofit American Antitrust Institute, which advocates aggressive antitrust enforcement, said that because the big carriers now have marketing alliances with rivals domestically and internationally, regulators "will need to look at claimed efficiencies closely in light of anticompetitive effects." William Swelbar, an airline researcher at the Massachusetts Institute of Technology, says there are parallels between the current merger fever and the wave of combinations that occurred in the late 1980s. "In 1985, the industry was in its infancy and the focus was on the domestic market," he said. The same is true today, "but now we're talking about network size in the global marketplace."

Antitrust Fears Few in Airline Deal

By SUSAN CAREY (Wall Street Journal)

A merger between Delta Air Lines Inc. and Northwest Airlines Corp. -- which could be announced as early as this week -- has less to fear from antitrust enforcers than past aviation deals, unless regulators grow uncharacteristically squeamish about the combination's sheer size.

If the airlines can reach an accord with their unionized pilots and hammer out the final details of a deal to create the world's largest carrier by traffic, the U.S. Department of Justice will be the ultimate judge of whether the merger can proceed. The department, which would be likely to review the case before a new administration arrives in Washington in January, has been kind in the past to deals like this one that don't involve a lot of overlap.

A transaction -- as well as any airline mergers that could follow a Delta-Northwest deal -- is certain to face political opposition from some members of Congress, and could run into turbulence with Northwest's other labor unions. Delta's pilots are its only major union.

Rep. James Oberstar, a Minnesota Democrat who is chairman of the House Transportation and Infrastructure Committee, has warned that he will oppose big airline mergers. "We can't stop a merger ourselves," said Jim Berard, spokesman for the House committee. "But we can make a lot of noise."

AFL-CIO union leaders met in Washington last week to develop strategies on possible mergers, and issued a statement saying they were "united in our commitment to protect airline employees from the severe harm that may stem from poorly conceived airline consolidations that ignore the needs of employees and the flying public."

In assessing proposed airline mergers, the Justice Department reviews nonstop and connecting routes between cities where the two carriers overlap, as well as whether their respective hubs are close enough to make them dominant in a region. The department also weighs the likelihood of rivals starting service within two years on city-pairs where the merged airline would have increased market power, potentially reining in the new carrier's ability to raise prices.

Delta, the world's No. 3 airline by traffic, has a big market share in the Southeastern U.S., in New York, and on trans-Atlantic routes. Northwest, which is ranked sixth globally and fifth in the U.S., is strong in the upper Midwest and on trans-Pacific routes.

"There isn't that much overlap between Northwest and Delta," said Andrew Steinberg, a former airline antitrust lawyer who recently stepped down as the Department of Transportation's assistant secretary for aviation and international affairs. If another airline merger is proposed soon, that doesn't mean the regulators will automatically reject the first, he said. "They analyze each transaction separately."

The last time the Justice Department shot down a big merger proposal was in 2001, when it identified competitive problems in the proposed combination of UAL Corp.'s United Airlines and US Airways Group Inc. At the time, the government found the two were the only significant providers of nonstop flights from Washington, D.C., to a number of cities, were the most significant carriers on a number of nonstop routes between their hubs, and would have had undue concentration along the East Coast.

The department in 2005 approved a merger of US Airways and America West Airlines, whose operations had little duplication.

Delta and Northwest see their proposed marriage as a merger with little overlap domestically and none on overseas routes, said people familiar with the matter. The two also don't anticipate reducing a lot of capacity, shuttering existing hubs or laying off many front-line workers.

In the past, Justice Department officials have said that if a merger brings cost and operational efficiencies, regulators could perceive those benefits as outweighing a merger's anticompetitive impact.

Diana Moss, vice president of the nonprofit American Antitrust Institute, which advocates aggressive antitrust enforcement, said that because the big carriers now have marketing alliances with rivals domestically and internationally, regulators "will need to look at claimed efficiencies closely in light of anticompetitive effects."

William Swelbar, an airline researcher at the Massachusetts Institute of Technology, says there are parallels between the current merger fever and the wave of combinations that occurred in the late 1980s. "In 1985, the industry was in its infancy and the focus was on the domestic market," he said. The same is true today, "but now we're talking about network size in the global marketplace."

Dollar Advances Against Euro, Yen Before U.S. Inflation Report

By Kim-Mai Cutler

Feb. 20 (Bloomberg) -- The dollar rose against the euro and yen before a government report that may show U.S. inflation accelerated last month, giving the Federal Reserve less reason to lower interest rates. The dollar rose against 13 of the 16 most-active currencies tracked by Bloomberg today as traders pared bets the Fed will reduce its benchmark rate by three-quarters of a percentage point next month. Crude oil traded below yesterday's record $100.10 a barrel in New York. The U.S. dollar index traded on ICE Futures in New York, which tracks the currency against its six major counterparts, rose 0.2 percent to 76.1. ``There's a distinct possibility inflationary pressures could grow and grow,'' said Simon Derrick, the London-based head of currency strategy at Bank of New York Mellon Corp. ``There is a risk we could see a high CPI number today.'' The U.S. currency rose to $1.4658 by 7:10 a.m. in New York, from $1.4725 yesterday. Against the yen, it climbed to 107.87 from 107.78. The euro fell 0.4 percent to 158.11 yen. Consumer prices rose at an annual rate of 4.2 percent in January from a year earlier, compared with 4.1 percent the previous month, according to the median forecast of economists surveyed by Bloomberg News. The Labor Department will release the report at 8:30 a.m. today in Washington. Interest rate futures on the Chicago Board of Trade show a 4 percent chance the Fed will lower rates by three quarters of a percent to 2.25 at its March 18 meeting, down from 32 percent odds a week ago. The remaining odds are for a half-point reduction.

STRIKE OVER: Hollywood Back To Work! (deadlinehollywooddaily.com)

UPDATE: Here's what the moguls have to say:

This is a day of relief and optimism for everyone in the entertainment industry. We can now all get back to work, with the assurance that we have concluded two groundbreaking labor agreements - with our directors and our writers -- that establish a partnership through which our business can grow and prosper in the new digital age. The strike has been extraordinarily difficult for all of us, but the hardest hit of all have been the many thousands of businesses, workers and families that are economically dependent on our industry. We hope now to focus our collective efforts on what this industry does best - writers, directors, actors, production crews, and entertainment companies working together to deliver great content to our worldwide audiences.
Peter Chernin, Chairman and CEO, the Fox Group
Brad Grey, Chairman & CEO, Paramount Pictures Corp.
Robert A. Iger, President & CEO, The Walt Disney Company
Michael Lynton, Chairman & CEO, Sony Pictures Entertainment
Barry M. Meyer, Chairman & CEO, Warner Bros.
Leslie Moonves, President & CEO, CBS Corp.
Harry Sloan, Chairman & CEO, MGM
Jeff Zucker, President & CEO, NBC Universal

News Corp. Enters Yahoo Fray

By Jessica E. Vascellaro (WSJ Online)

News Corp. and Yahoo Inc. are in discussions about combining MySpace and other News Corp.-owned online properties with Yahoo, according to people familiar with the matter.

The discussions are aimed at helping Yahoo fend off Microsoft Corp's unsolicited takeover offer, which was initially valued at $44.6 billion. Under the deal being discussed, News Corp. would get a stake in Yahoo which could be more than 20%.

The deal under discussion, which would also include a contribution of cash ...

U.S. Economy: Retail Sales Unexpectedly Rose 0.3% in January

By Shobhana Chandra

Feb. 13 (Bloomberg) -- Retail sales in the U.S. unexpectedly rose in January, easing concern that the world's largest economy has already slipped into a recession.

The 0.3 percent increase was led by spending on autos, clothes and gasoline, the Commerce Department said today in Washington. The figure followed a 0.4 percent decrease the previous month. Purchases excluding automobiles and gasoline were unchanged.

Excluding automobiles, purchases gained 0.3 percent after a 0.3 percent decline in December.

``Today's report will diminish recession anxieties, but it doesn't dispel them altogether,'' said Richard DeKaser, chief economist at National City Corp. in Cleveland, who accurately forecast the sales gain.

Demand from consumers, whose spending accounts for about 70 percent of the economy, will probably wane in coming months, forcing the Federal Reserve to lower interest rates further, economists said. Macy's Inc., Target Corp. and Limited Brands Inc. said last week that sales at stores open more than a year declined in January. Macy's cut 2,300 jobs.

Treasury securities dropped after the report, with 10-year note yields rising to 3.70 percent at 10:22 a.m. in New York, from 3.66 percent late yesterday. The Standard & Poor's 500 Index added 0.6 percent to 1,356.24. At the same time, the S&P Retailing Index, which includes Home Depot Inc. and Best Buy Co., retreated 0.4 percent.

Retail sales were projected to fall 0.3 percent after an originally reported 0.4 percent drop the prior month, according to the median estimate in a Bloomberg News survey of economists.

Threats to Spending

The worst housing slump in a quarter century and shrinking access to credit threatens to hurt spending this quarter. The economy lost 17,000 jobs in January, the first drop in more than four years. The Standard & Poor's 500 Index has fallen three consecutive months, the longest losing streak since 2003, eroding households' investment portfolios.

Consumers are increasingly limiting expenses to those they can't avoid. The amount Americans must spend each month on debt service, housing, medical costs, and food and energy bills rose to 66.9 percent of their total spending in December, the highest since records began in 1980, according to Bloomberg figures.

``Food prices have been rising and gasoline prices have been rising and so we got a little boost to overall sales there,'' said Kevin Logan, senior market economist at Dresdner Kleinwort in New York, who forecast retail sales would advance 0.2 percent. ``There's evidence here that the slump in the housing market is affecting spending.''

Excluding automobiles, purchases gained 0.3 percent after a 0.3 percent decline in December.

Car Dealers

Sales at automobile dealerships and parts stores rose 0.6 percent after a decline of 1.1 percent in December, the Commerce Department said.

That contrasts with industry figures that showed cars and light trucks sold last month at a 15.2 million annual pace, down 6.7 percent from December. Auto industry sales this year are forecast to drop to the lowest level since 1998.

Filling station sales rose 2 percent in January after remaining unchanged the prior month, today's report showed. Regular gasoline reached as high as $3.11 a gallon in early January, about 11 cents more than the average for the prior month, according to AAA. Excluding gas, retail sales rose 0.1 percent.

Sales also rose at clothing retailers, which posted a 1.4 percent increase, and grocery and beverage stores, which gained 0.6 percent. Purchases at non-store retailers, which include online and catalog sales, rose 0.5 percent.

Department Stores

Department-store sales dropped 1.1 percent. Stores selling building materials showed a 1.7 percent decrease in sales, after falling 2.5 percent. Sales also fell at electronics, appliance and sporting goods stores.

Excluding autos, gasoline and building materials, the retail group the government uses to calculate gross domestic product figures for consumer spending, sales rose 0.2 percent, after a 0.1 percent decrease the prior month. The government uses data from other sources to calculate the contribution from the three categories excluded.

Today's Commerce Department report also runs counter to industry figures that show January sales fell at stores from Target to Nordstrom Inc. even as some retailers slashed prices by as much as 75 percent. Sales at stores open at least a year rose 0.5 percent from a year earlier, the worst January since 1970, according to the International Council of Shopping Centers.

The industry figures account for about 17 percent of total retail sales, which make up almost half of consumer spending. Retailers' January results followed the worst holiday shopping season since 2002, according to ICSC.

A U.S. recession over the next 12 months is now an even bet, according to a Bloomberg survey of economists taken from Jan. 30 to Feb. 7. The odds of a recession rose from 40 percent in January.

Google Rips Microsoft's Proposed Takeover of Yahoo, Saying It Would Stifle Internet Innovation

By Michael Liedtke, AP Business Writer

SAN FRANCISCO (AP) -- Google Inc. raised the specter of Microsoft Corp. using its proposed $42 billion acquisition of Yahoo Inc. to gain illegal control over the Internet, underscoring the online search leader's queasiness about its two biggest rivals teaming up.

The critical remarks, posted online Sunday by Google's top lawyer, represented the Mountain View-based company's first public reaction to Microsoft's unsolicited bid for Yahoo since the offer was announced Friday.

"Microsoft's hostile bid for Yahoo raises troubling questions," David Drummond, Google's chief legal officer, wrote. "This is about more than simply a financial transaction, one company taking over another. It's about preserving the underlying principles of the Internet: openness and innovation."

Google's opposition isn't a surprise, given that Microsoft views Yahoo as a crucial weapon in its battle to gain ground on Google in the Internet's booming search and advertising markets.

Redmond, Wash.-based Microsoft has been trying to depict a Yahoo takeover as a boon for both advertisers and consumers because the two companies together would be able to compete against Google more effectively.

But Google is painting a starkly different picture, asserting that Microsoft will be able to stifle innovation and leverage its dominating Windows operating system to set up personal computers so consumers are automatically steered to online services, such as e-mail and instant messaging, controlled by the world's largest software maker.

In a move that illustrates just how badly Google wants to torpedo the deal, Google Chief Executive Officer Eric Schmidt called Yahoo CEO Jerry Yang Friday to offer his help in repelling Microsoft, according to a report Sunday on The Wall Street Journal's Web site, which cited anonymous people familiar with the matter.

The assistance didn't include a counterbid, but may have included supporting other potential suitors, or a revenue guarantee in exchange for an ad partnership with Yahoo, the people said, according the newspaper.

AT&T Inc., Time Warner Inc. and News Corp. aren't planning to enter the bidding, the Journal said, citing the people familiar.

To help make its point, Google pointed to the way Microsoft previously used Windows to help extend the reach of its Web browser and other applications -- a strategy that triggered a U.S. Justice Department lawsuit alleging the software maker illegally used its operating system to stifle competition. The dispute ended with a 2002 settlement that required Microsoft to abandon some of its past practices.

"Could Microsoft now attempt to exert the same sort of inappropriate and illegal influence over the Internet that it did with the PC?" Drummond wrote.

Brad Smith, Microsoft's general counsel, said preventing Microsoft from buying Yahoo would undermine competition by allowing Google to become even more dominant than it already is on the Internet

"Microsoft is committed to openness, innovation, and the protection of privacy on the Internet," Smith said. "We believe that the combination of Microsoft and Yahoo! will advance these goals."

If they get together, Microsoft and Yahoo would have about 16 percent of the worldwide Internet search market -- still far behind Google's 62 percent share, according to comScore Media Metrix. But Microsoft and Yahoo already are far bigger in than Google in e-mail and instant messaging, and conceivably would be in a better position to squash rival services if they combined.

Illustrating the enormous stakes involved in a deal that could reshape the technology and media industries, Google and Microsoft are already debating the pros and cons before Yahoo has responded to the offer.

Yahoo so far has little to say except that its board will carefully examine Microsoft's bid -- a process that "can take quite a bit of time," according to a message posted on the Sunnyvale-based company's Web site.

The review "will include evaluating all of the company's strategic alternatives, including maintaining Yahoo as an independent company," Yahoo said on its Web site.

Most analysts believe Yahoo will have little choice but to sell to Microsoft, with its stock price near a four-year low at the time of the bid and its profits falling since late 2006. When it was first announced, Microsoft's offer was 62 percent above Yahoo's market value -- a premium analysts doubt any other suitor will be able to top.

If Yahoo accepts, antitrust regulators in both the United States and Europe are expected to begin an exhaustive review that some experts think could last a year. Microsoft believes it could get the necessary approvals to take over Yahoo late this year.

If nothing else, Google probably will try to raise enough alarms about the Microsoft-Yahoo deal to delay its approval for as long as possible. By doing so, Google would have more time to draw up plans to counteract the combination.

Google also is borrowing a page from Microsoft's book by urging antitrust regulators to take a hard look at the proposed marriage between its two rivals.

Just days after Google struck a $3.1 billion deal to buy online ad service DoubleClick Inc. last year, Microsoft began lobbying regulators to block the transaction. U.S. regulators blessed Google's DoubleClick acquisition late last year after an eight-month review, but the antitrust inquiry in Europe remains open.