Microsoft and Yahoo on Wednesday inked a 10-year Web search deal to better compete against market leader Google Inc but stopped short of combining their display advertising businesses.
Under the deal announced on Wednesday, Microsoft's Bing search engine will be the exclusive algorithmic search and paid search technology for Yahoo's sites, while Yahoo will be responsible for selling premium search ads for both companies.
Yahoo estimated the deal will boost its annual operating income by about $500 million and yield capital expenditure savings of $200 million. Yahoo also expects the deal to boost annual operating cash flow by about $275 million.
Yahoo reported income from operations of $13 million in 2008, hurt by $487.5 million in goodwill impairment charge and $107 million in restructuring charges. In 2007, operating income was $695 million.
Microsoft Chief Executive Officer Steve Ballmer said the deal gives its new search engine, Bing, the scale needed to attract more users and advertisers.
Yahoo, meanwhile, said it will focus on its portfolio of websites, expanding into mobile advertising and other products.
Under the deal, Microsoft will acquire an exclusive 10-year license to Yahoo's core search technologies, and it will combine them with its own search technologies.
Microsoft will compensate Yahoo through a revenue-sharing agreement and pay traffic acquisition costs (TAC) to Yahoo at an initial rate of 88 percent of search revenue generated on Yahoo sites in the first five years.
Each company will maintain its own separate display advertising business and sales force, they said.
The deal combines the number two and number three players in the U.S. market for Internet search and positions them to better compete with Google, which has an estimated 65 percent share of the US search market.
The companies said they expect the deal to be "closely reviewed" by regulators, but were "hopeful" it can close in early 2010.
Shares of Yahoo were down $1.34 at $15.88 in early Nasdaq trading. Shares of Microsoft were up 36 cents to $23.83. Google shares fell $4.55 to $435.30.