After a year and a half of dealing, the tech giants reach a deal to take on Google, which holds a 65% market share in online search.
NEW YORK (CNNMoney.com) -- Microsoft and Yahoo reached a long-awaited partnership Wednesday in a bid to challenge Google's dominance in online search.
Under the 10-year deal, searches on Yahoo.com will be powered by Microsoft's new Bing search engine. Yahoo, in turn, will be responsible for attracting premium advertisers.
Microsoft will pay Yahoo 88% of the revenue it gains from searches on Yahoo's sites. Microsoft will also have the rights to integrate Yahoo search technology into its own existing Web search platforms.
Yahoo said the revenue sharing agreement will increase its operating income by about $500 million annually.
According to Microsoft Chief Executive Steve Ballmer, the deal will allow Microsoft to "create more innovation in search, better value for advertisers and real consumer choice in a market currently dominated by a single company."
And in a dig against search market leader Google (GOOG, Fortune 500), the companies said in a joint statement that "advertisers no longer have to rely on one company that dominates more than 70% of all search."
An 18-month odyssey. It was a partnership that was a long time in the making. Microsoft's (MSFT, Fortune 500) search market share has been slipping for more than two years, and the company has struggled to make its online advertising unit profitable. Meanwhile, Yahoo (YHOO, Fortune 500), once the search market leader, dropped to a distant second place behind leader Google (GOOG, Fortune 500) by 2007.
The dealings between the two companies began Feb. 1, 2008, when Microsoft made an unsolicited $44.6 billion cash and stock bid for Yahoo. A week later, Yahoo rejected the bid, saying the $31 per share offer "massively undervalues" the company, despite the fact that the bid represented a 62% premium over Yahoo's $19.18 closing stock price a day before the announcement.
In an attempt to fend off Microsoft, Yahoo launched a two-week trial partnership with rival Google on April 10, 2008. That involved outsourcing advertising space to Google as part of a short-term agreement that could eventually lead to a bigger partnership.
Microsoft threatened to take its bid to Yahoo's shareholders by the end of April if a deal could not be reached, and even sweetened the pot to $33 per share. In a turnaround move, Microsoft opted to avoid a hostile takeover and simply dropped the bid for Yahoo altogether on May 5 of last year. Microsoft CEO Ballmer cited the economics of the deal as well as Yahoo's interest in a long-term Google partnership as reasons.
Almost as soon as the deal seemingly died, signs of life re-emerged. First, activist investor Carl Icahn threatened Yahoo's board with a proxy battle if the company's executives didn't return to the bargaining table with Microsoft. Then, shares of Yahoo rocketed higher on May 19, 2008, when rumors circulated that Microsoft was interested in Yahoo's search advertisement business.
On June 12 of last year, however, Yahoo announced that discussions with Microsoft had ended without a pact. The same day, Yahoo turned around and announced a deal with Google to put Google ads on Yahoo's search pages. That tie-up was later nixed after a Justice Department antitrust investigation prompted Google to end the partnership. Icahn and Yahoo reached a truce in late July of last year.
The situation at Yahoo took a turn for the worse after the credit crisis erupted in October. Yahoo announced it would lay off 10% of its workforce in late October, shares slipped below $9 in November and Chief Executive Jerry Yang announced his resignation.
When Carol Bartz came on as Yahoo's new CEO in January 2009, she said she would not sell the company outright, but appeared to be more open to a sale of the company's search business.
Rumors of a possible deal were reignited when Bartz acknowledged at the All Things Digital conference on May 27 that Yahoo and Microsoft had been talking "a little bit," and said outright that Yahoo's search business was for sale, albeit for "boatloads" of money.
The next day, Ballmer unveiled Microsoft's new Bing search engine. Reports began to circulate in mid-June that Bing was a success, growing Microsoft's beaten-down search market share and eating into Yahoo's, and Ballmer reiterated to Fortune's Patricia Sellers that Microsoft "remains open to a partnership with Yahoo."
