Microsoft and Yahoo! finally ink a deal to take on Google

After years of wrangling to avoid a Microsoft takeover, Yahoo! has finally agreed to a partnership with the software giant.

The pot was sweetened this spring by the launch of Microsoft’s search engine known as Bing. It has done well enough to entice Yahoo!’s new CEO, Carol Bartz, to agree to the deal in record time, because she viewed the partnership differently than her two predecessors, Terry SemelTerry Semel and co-founder Jerry YangJerry Yang. In May, 2008, they decided to turn down a Microsoft bid to take over the company for a whopping $47.5 billion dollars.

"This agreement comes with boatloads of value for Yahoo!, our users, and the industry, and I believe it establishes the foundation for a new era of Internet innovation and development," said Yahoo! Chief Executive Officer Carol Bartz. "Users will continue to experience search as a vital part of their Yahoo! experiences and will enjoy increased innovation thanks to the scale and resources this deal provides. Advertisers will also benefit from scale and enjoy greater ease of use and efficiencies working with a single platform and sales team for premium advertisers. Finally, this deal will help us increase our investments in priority areas in winning audience properties, display advertising capabilities and mobile experiences."

If the deal passes anti-trust inspection, it will close next year, and it will improve Yahoo!’s annual profit by $500 million. The company will also benefit from an estimated $275 million savings since it won’t have to invest in its own search technology.

Microsoft CEO, Steve BallmerSteve Ballmer, took over the position after Bill GatesBill Gates retired earlier this year. Gates decided to work full time on his philanthropy activities at Bill and Melinda GatesMelinda Gates Foundation. Here is what Ballmer had to say about the capture of a deal with Yahoo!:

"Through this agreement with Yahoo!, we will create more innovation in search, better value for advertisers and real consumer choice in a market currently dominated by a single company," said Ballmer. "Success in search requires both innovation and scale. With our new Bing search platform, we've created breakthrough innovation and features. This agreement with Yahoo! will provide the scale we need to deliver even more rapid advances in relevancy and usefulness. Microsoft and Yahoo! know there's so much more that search could be. This agreement gives us the scale and resources to create the future of search."

The terms of the deal as reported by USA Today:

The term of the agreement is 10 years;

-- Microsoft will acquire an exclusive 10 year license to Yahoo!'s core search technologies, and Microsoft will have the ability to integrate Yahoo! search technologies into its existing Web search platforms;

-- Microsoft's Bing will be the exclusive algorithmic search and paid search platform for Yahoo! sites. Yahoo! will continue to use its technology and data in other areas of its business such as enhancing display advertising technology;

-- Yahoo! will become the exclusive worldwide relationship sales force for both companies' premium search advertisers. Self-serve advertising for both companies will be fulfilled by Microsoft's AdCenter platform, and prices for all search ads will continue to be set by AdCenter's automated auction process;

-- Each company will maintain its own separate display advertising business and sales force;

-- Yahoo! will innovate and "own" the user experience on Yahoo! properties, including the user experience for search, even though it will be powered by Microsoft technology;

-- Microsoft will compensate Yahoo! through a revenue sharing agreement on traffic generated on Yahoo!'s network of both owned and operated (O&O) and affiliate sites; -- Microsoft will pay traffic acquisition costs (TAC) to Yahoo! at an initial rate of 88 percent of search revenue generated on Yahoo!'s O&O sites during the first five years of the agreement; and

-- Yahoo! will continue to syndicate its existing search affiliate partnerships.

-- Microsoft will guarantee Yahoo!'s O&O revenue per search (RPS) in each country for the first 18 months following initial implementation in that country;

*At full implementation (expected to occur within 24 months following regulatory approval), Yahoo! estimates, based on current levels of revenue and current operating expenses, that this agreement will provide a benefit to annual GAAP operating income of approximately $500 million and capital expenditure savings of approximately $200 million. Yahoo! also estimates that this agreement will provide a benefit to annual operating cash flow of approximately $275 million; and:

The agreement protects consumer privacy by limiting the data shared between the companies to the minimum necessary to operate and improve the combined search platform, and restricts the use of search data shared between the companies. The agreement maintains the industry-leading privacy practices that each company follows today.

The agreement does not cover each company's Web properties and products, email, instant messaging, display advertising, or any other aspect of the companies' businesses. In those areas, the companies will continue to compete vigorously.

The Obama administration’s Justice Department is committed to closely scrutinize technological deals like these to make sure to eliminate and prohibit unfair practices.

If the global deal gets the green light by the Justice Department, it will offer consumers and advertisers better choices in the search engine and software markets. Yahoo!!!!!