Microsoft +Yahoo

Microsoft Corp and Yahoo agree inked a 10-year Web search deal to better compete against market leader Google but stopped short of combining their display advertising businesses.

Yahoo shares fell 10% as some investors were disappointed by the limited scope of the deal, which did not include any upfront payments for Yahoo as some had expected. Shares of Microsoft edged higher, while Google shares fell 1%. “Those that were looking forward to a take-out, the deal today was rather disappointing,” said Marc Pado, US market strategist for Cantor Fitzgerald. “The 10-year pact, it’s not a bad thing. It’s not as good as what investors expected. The deal culminates a lengthy, and at times contentious, dance between the two companies. They have been in on-and-off-again talks on a search partnership since Yahoo rebuffed Microsoft’s $47.5bn takeover bid last year. Under the deal announced yesterday, Microsoft’s Bing search engine will power search queries on Yahoo’s sites. Yahoo’s sales force will be responsible for selling premium advertising based on search terms for both companies. Microsoft’s AdCenter technology will serve the standard sponsored links that appear alongside search results. While Yahoo CEO Carol Bartz had previously said that any deal would require a partner with “boatloads of money,” she said yesterday that the revenue share agreement in the Microsoft deal was more valuable to Yahoo than a one-time payment.“Having a big up-front cash payment doesn’t really help us from an operating standpoint,” Bartz said in a conference call with Microsoft CEO Steve Ballmer. Microsoft will compensate Yahoo through a revenue-sharing agreement that pays Yahoo at an initial rate of 88% 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.

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