The two giant technology companies have announced an internet search partnership which aims to rival GoogleYahoo! and Microsoft unveiled a long-awaited internet search partnership today in a bid to take on the might of market leader Google.

Under the no-cash deal, Yahoo! will use Microsoft’s new Bing search engine on its own sites, while Yahoo! will act as the exclusive global sales force for the companies’ premium search advertisers.

The agreement between the struggling internet portal company and software giant will run for 10 years, longer than expected, giving them an opportunity to provide advertisers with a viable rival to Google’s money-making online advertising platform.

The deal, which will be subject to review by US anti-trust regulators, is expected to close in early 2010, the companies said in a statement. The search partnership caps a convoluted and sometimes farcical courtship which has seen both companies fall further behind Google in search and Yahoo!’s stock plunge in value.
Under the agreement, Microsoft will acquire an exclusive 10-year licence to Yahoo!’s core search technologies, and Microsoft will be able to integrate Yahoo! search technologies into its existing web search platforms.

Microsoft did not have to give Yahoo! an upfront payment to make it happen, as many Yahoo! investors had hoped. But Yahoo! will keep 88 per cent of the revenue from all search ad sales on its site for the first five years of the deal, and will have the right to sell ads on some Microsoft sites. Each company will maintain its own separate display advertising business and sales force, they said.

“This agreement comes with boatloads of value for Yahoo!, our users, and the industry,” said Carol Bartz, who replaced co-founder Jerry Yang as Yahoo! chief executive after he rejected a $47.5 billion (£29 billion) takeover bid from Microsoft last year.

“I believe it establishes the foundation for a new era of internet innovation and development,” Ms Bartz said. Describing the agreement as a “game-changer,” she said it “creates a significant competitive alternative in search.”

“This really is a win-win agreement both for Microsoft and Yahoo!,” added Microsoft chief executive Steve Ballmer.

The extended reach will allow Microsoft to introduce Bing, its recently upgraded search engine, to more people. Taking over the search responsibilities on Yahoo!’s highly trafficked sites gives Microsoft a better chance to convert web users who had been using Google by force of habit.

Even with Yahoo’s help, Microsoft still has its work cut out. Combined, Microsoft and Yahoo have a 28 per cent share of the internet search market in the United States, well behind Google’s 65 per cent, according to online measurement firm comScore. Google is even more dominant in the rest of the world, with a global share of 67 per cent compared to a combined 11 per cent for Microsoft and Yahoo!.

Ross Sandler, analyst at RBC Capital Markets, said: “Overall, it’s a big positive for two companies that have been struggling to keep up with Google. This consolidates their resources and allows them to make a more concerted push as the No. 2 entity.”

Yahoo! said it stood to gain about $500 million in annual operating income and $200 million in capital expenditure savings from the deal.

The company also estimated the agreement would provide it with a $275-million benefit to annual operating cash flow because it will not have to invest in its own search technology. An unspecified number of Yahoo! engineers will lose their jobs as the company scales back.

Shares of Yahoo! slid $1.59, or 9.2 per cent, to $15.63, as investors digested the fact that the company is not getting an upfront payment. Microsoft shares advanced 1 cent to $23.48. Google shares fell $4.97, 1.1 percent, to $434.88.

The alliance gives Yahoo! a chance to recoup some of the money squandered in May 2008, when it turned down a chance to sell the entire company to Microsoft for $47.5 billion. Its market value now stands at about $22 billion.

The two rivals began talking about a possible partnership as far back as 2005 before Microsoft intensified the courtship with last year’s attempt to buy Yahoo!.

Microsoft is bolstering its efforts to take on Google in search just as Google attacks Microsoft’s bread-and-butter business of making software for personal computers.

Google is working on a free operating system for inexpensive personal computers in a move that could threaten Microsoft’s ubiquitous Windows franchise. If it gains traction, Google’s alternative, called Chrome OS, could divert some revenue from Microsoft.

A spokesperson for Google said: “There has traditionally been a lot of competition online, and our experience is that competition brings about great things for users. We’re interested to learn more about the deal.”