Microsoft, and Yahoo finally sign 10-year search deal to take on Google

Software and internet giants Microsoft and Yahoo have finally reached a partnership after months of failed talks, in a move that will see the two companies attempt to compete with Google by uniting behind Microsoft’s Bing search engine.

Bing will become the default search engine used on all of Yahoo’s sites. Meanwhile, Yahoo will act as the two partners’ global sales force for all its advertising.

But Wall Street reacted badly to the news, with Yahoo’s share price plummeting 12.08% to $US15.14, while Microsoft’s shares gained 1.41% to $US23.80. The reaction was likely due to the announcement Yahoo’s own search engine will effectively cease to exist, and the company instead will focus on advertising.

The companies have signed a 10-year deal, which is still subject to review by US regulatory authorities, and is restricted to just revenue from internet search and related products.

Yahoo said the partnership will earn it about $US500 million in annual operating income, and $US200 million in expenditure savings. It also announced that some of its employees will be asked to work at Microsoft, and a number of redundancies will also be made.

The two companies combined will have a market share of 30%, according to research company ComScore. Google still holds a 65% share, but analysts note this partnership is the closest any other company has been to catching up to the market leader.

“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,” Yahoo chief executive Carol Bartz said in a statement.

Microsoft chief executive Steve Ballmer said the partnership will allow Bing, which has already achieved early success, to compete with Google.

“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,” Ballmer said. “This agreement gives us the scale and resources to create the future of search.”

The partnership comes after talks between the two companies failed under the leadership of Yahoo’s former chief executive Jerry Yang, who turned down a $US47.5 billion takeover offer from Microsoft.

Since Yang stepped down from his role and was replaced by Bartz, investors and analysts have been more optimistic about a deal between the two companies.