Microsoft, Yahoo agree on long-sought search deal

SAN FRANCISCO — Microsoft Corp. has finally roped Yahoo Inc. into an Internet search partnership, capping a convoluted pursuit that dragged on for years and finally setting the stage for the rivals to make an all-out assault against the dominance of Google Inc.

The 10-year deal announced Wednesday gives Microsoft access to the Internet's second-largest search engine audience, adding a potentially potent weapon to the software maker's Internet arsenal as it tries to better confront Google, the leader in online search and advertising.

The extended reach will allow Microsoft to introduce its recently upgraded search engine, called Bing, to more people. The Redmond, Wash.-based software maker believes Bing is just as good, if not better, than Google's search engine. Taking over the search responsibilities on Yahoo's highly trafficked site gives Microsoft a better chance to convert Web surfers who had been using Google by force of habit.

"Microsoft and Yahoo know there's so much more that search could be," said Microsoft Chief Executive Steve Ballmer. "This agreement gives us the scale and resources to create the future of search."

In return for turning over the keys to its search engine, Yahoo will get to keep 88 percent of the revenue from all search ad sales on its site for the first five years of the deal, and will have the right to sell ads on some Microsoft sites.

Yahoo estimated the deal — which the companies hope to close next year — will boost its annual operating profit by $500 million and save the Sunnyvale, Calif.-based company about $275 million on capital expenditures a year because it won't have to invest in its own search technology.

In premarket activity, shares of Yahoo slid $1.19, or 6.9 percent, to $16.03. Microsoft shares advanced 13 cents to $23.60.

Assuming it can pass antitrust scrutiny, the alliance could give Yahoo a chance to recoup some of the money squandered in May 2008, when it turned down a chance to sell the entire company to Microsoft for $47.5 billion.

Yahoo's market value currently stands at about $24 billion. Yahoo just came off a tough quarter in search advertising, with its revenue in that niche falling 15 percent in the April-June period.

The two rivals began talking about a possible alliance as far back as 2005 before Microsoft intensified the courtship with last year's attempt to buy Yahoo.