SAN FRANCISCO/SEATTLE (Reuters) - Microsoft Corp and Yahoo Inc have launched a 10-year Web search deal to challenge market leader Google but stopped short of combining other advertising businesses or suggesting any deeper ties.
The long-expected deal means Microsoft’s new Bing search engine will be combined with Yahoo’s experience attracting advertisers in the first serious threat to Google Inc -- if the companies get regulatory approval and can make the partnership work.
Yahoo shares fell 12 percent as some investors were disappointed by the limited scope of the deal, which did not include up-front payments for Yahoo. Some investors had expected up to $3 billion up-front, according to a Bernstein report.
“I would have preferred more money,” said Ryan Jacob, chief investment officer of Jacob Asset Management, pointing to the lack of an upfront payment, as well as revenue-sharing and cost-savings terms that were not as high as he expected.
“There are risks on both sides. Big deals like this tend not to work out. It’s a long-term deal that’s going to take a long time to implement,” said Jacob, whose $40 million fund holds some Yahoo shares. “It’s better than no deal.”
Microsoft shares closed up 1.4 percent, while Google shares fell 0.8 percent.
Yahoo estimated the deal would 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.
Under the deal announced on Wednesday, Microsoft’s Bing search engine will power search queries on Yahoo’s sites. Yahoo’s sales force will be responsible for selling premium search ads to big buyers for both companies.
The partnership poses only a theoretical challenge to Google at present. It could take two-and-a-half years to get approval and be fully implemented, according to Yahoo Chief Executive Carol Bartz, which would mean the partnership would not be fully effective until early 2012.
Microsoft and Yahoo still face antitrust and privacy issues. Google dropped a planned search partnership with Yahoo last year under pressure from the U.S. Justice Department.
But experts said the deal would likely get the go-ahead after examination by Obama administration antitrust officials since it would create a stronger rival to market leader Google.
Google said only that it was “interested” in the deal, while the chairman of the U.S. Senate antitrust panel said it warrants “careful scrutiny.”
Microsoft and Yahoo expected the deal to be “closely reviewed” by regulators, but they were “hopeful” it could close in early 2010.
The deal concludes a lengthy, and at times contentious, dance between the two companies. They have been in on-again, off-again talks since Yahoo rebuffed Microsoft’s $47.5 billion takeover bid last year.
Microsoft CEO Steve Ballmer clashed last year with former Yahoo CEO Jerry Yang, who was strongly opposed to an all-out acquisition. Relations between the two companies improved under new Yahoo CEO Bartz, who took the reins in January and started to shake up Yahoo’s management.
Ballmer and Bartz met “three or four times” over the past six months as they hammered out a deal, according to Ballmer.
HOW THE DEAL WORKS
While Bartz had previously said any deal would require a partner with “boatloads of money,” she said on Wednesday the agreement provided “boatloads of value,” adding 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.
Microsoft’s AdCenter technology will serve the standard sponsored links that appear alongside search results. Microsoft will pay Yahoo an initial rate of 88 percent of search revenue generated on Yahoo sites in the first five years.
That means Yahoo can concentrate on selling ads on its websites, while still generating revenue from search ads without the expense of maintaining its own search engine.
Bartz said the deal will result in “redundancies” in Yahoo’s staff, although she declined to be specific. She stressed any changes would not occur until after full implementation of the partnership.
According to comScore, Google has a 65 percent share of the U.S. search market, compared with Yahoo’s 19.6 percent and Microsoft’s 8.4 percent.
“Microsoft will be able to report a greater share in terms of search ... And Yahoo doesn’t have to spend any more money on search,” said Barry Diller, CEO of IAC/InterActiveCorp, which owns rival search engine Ask.com.
Yahoo shares closed down $2.08 at $15.14 on Nasdaq, while Microsoft closed up 33 cents at $23.80 and Google shares closed down $3.61 at $436.24.
Additional reporting by Tiffany Wu, Paul Thomasch, Robert MacMillan and Diane Bartz; editing by Derek Caney and Andre Grenon
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