Yahoo-Microsoft deal set, taking aim at Google

U.S. and European regulators have cleared the long-discussed Internet search partnership between Microsoft Corp. and Yahoo Inc., enabling the rivals to form a tag team as they try to mount a more serious challenge to Google Inc.

The government approvals announced on Thursday anointed an alliance that Microsoft and Yahoo proposed nearly seven months ago after years of flirtation and often contentious negotiations.

Microsoft first approached Yahoo about working together in late 2006 and again in 2007. In 2008, Microsoft launched a hostile bid to buy Yahoo in its entirety, only to withdraw the $47.5 billion offer in exasperation.

Microsoft is counting on the 10-year deal with Yahoo to provide more muscle as it tries to counter Google’s domination of the lucrative Internet search market. The companies make money by charging advertisers to pay to have their links appear when people search for certain terms.

While gaining access to Yahoo’s Internet search audience and advertisers is bound to help, it could still prove to be too little, too late.

The U.S. Department of Justice and European Commission had no problems with Microsoft and Yahoo working together largely because Google is so far ahead of them in the lucrative Internet search market.

Microsoft has been making some minor strides in the United States since it overhauled its search engine and renamed it Bing last summer. But the progress has primarily come at Yahoo’s expense.

It’s going to take a while before all the pieces of the complex Microsoft-Yahoo deal will be in place. The companies hope Microsoft’s technology will be ready to start processing search requests that people enter on Yahoo’s U.S. site by the end of this year. But getting everything ready around the rest of the world is expected to take until 2012.

Yahoo figures to make more money from the deal because it allows the company to keep 88 per cent of the revenue from search ads on its website during the first five years, while Microsoft absorbs most of the expenses. Yahoo estimates the partnership eventually could boost its annual operating profit by $500 million. The financial gains aren’t expected to start flowing to Yahoo until next year.

To start, Yahoo will get $150 million from Microsoft to help offset its expenses for the transition to a new technology. The payments will be made in instalments, with the first checks due before April.

Microsoft will also take on about 400 of Yahoo’s 13,900 employees, with the first transfers expected to take place this year.

“Although we are just at the beginning of this process, we have reached an exciting milestone,” Microsoft CEO Steve Ballmer said. “I believe that together, Microsoft and Yahoo will promote more choice, better value and greater innovation to our customers as well as to advertisers and publishers.”

Even though Microsoft’s technology will be steering things, Yahoo insists its search results and advertising won’t be identical to what’s served up on Bing. Yahoo can still shape the presentation of the results.

“This breakthrough search alliance means Yahoo can focus even more on our own innovative search experience,” said CEO Carol Bartz.