July 29, 2009 / 12:29 AM / 9 years ago

CORRECTED - UPDATE 2-Microsoft, Yahoo agree on ad partnership-source

(Corrects day of the week in the first paragraph)

* Ad deal to be announced in 24 hours - source

* Microsoft won’t pay Yahoo an upfront fee - source

* Deal focuses on revenue sharing - source

* Yahoo, Microsoft shares higher after hours (Adds details on expected deal, background)

SEATTLE, July 28 (Reuters) - Microsoft Corp (MSFT.O) and Yahoo Inc YHOO.O have agreed to an online search and advertising partnership, in an attempt to rival Google Inc, (GOOG.O) that will be announced within 24 hours, a source familiar with the situation said on Tuesday.

Microsoft will not pay an upfront fee to Yahoo, and the focus of the deal is on sharing revenue between the two companies, said the source, who did not want to be identified because a formal announcement has not been made.

The news and details of the expected deal were first reported by the AllThingsDigital blog and Advertising Age.

Microsoft and Yahoo declined comment. The two companies have talked for months about cooperating in the online advertising market, dominated by Google.

    Microsoft tried to buy Yahoo last year but its $47.5 billion bid was rebuffed and Yahoo’s attempt to seal a search advertising deal with Google Inc (GOOG.O) fell apart under regulatory scrutiny.

    Under the expected deal, Microsoft’s new Bing search engine will power Yahoo’s searches, according to Advertising Age, while Yahoo will handle the advertising sales, using Microsoft technology.

    The deal should give Bing a giant boost in competing with Google’s search engine. Google’s search engine dominates the marketplace with 65 percent of U.S. Internet searches, according to figures provided by research firm ComScore. Last month, Microsoft had only 8.4 percent of the market and Yahoo 19.6 percent.

    There is a chance a deal combining the powers of the second and third-ranked search engine companies would be blocked by antitrust regulators. Google and Yahoo dropped plans for an advertising partnership last year under opposition from the U.S. Department of Justice.

    Shareholders of both Microsoft and Yahoo have been urging the two to strike a deal for some time. Earlier this month, activist investor Carl Icahn, who owns about 5 percent of Yahoo and is a director on its board, spoke out in favor of a search deal, as talks between the two companies appeared to regain momentum.

    Shares of Yahoo traded at $17.39 in after-hours trading after closing at $17.22, while shares of Microsoft rose to $23.51 in after-hours trading from their close of $23.47. (To read more about the media business, visit the Reuters MediaFile blog at blogs.reuters.com/mediafile/)

    Reporting by Bill Rigby and Alexei Oreskovic, writing by Tiffany Wu; Editing by Steve Orlofsky and Carol Bishopric

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