Yahoo-Microsoft Deal

In the spring of 2008, Microsoft made a $47.5 billion hostile offer to buy Yahoo after on-and-off talks about a merger had led nowhere. After a bruising, four-month battle, Microsoft abandoned the offer. Anger among Yahoo shareholders led to a management change and the replacement of its co-founder Jerry Yang by Carol Bartz, an outsider who is now Yahoo's chief executive. On July 29, 2009, the two companies announced a more limited deal, a partnership in Internet search and advertising intended to create a stronger rival to the industry powerhouse Google.
The new Microsoft-Yahoo pact is a measured step that represents a pragmatic division of duties between the two companies. Under the pact, Microsoft will provide the underlying search technology on Yahoo's popular Web sites. The deal provides a lift for Microsoft's recent overhaul of its search engine, renamed Bing, which has won praise and favorable reviews, after years of falling farther and farther behind Google. For Yahoo, the move furthers the strategy under Ms. Bartz to focus the company on its strengths as a producer of Web media sites, from finance to sports, as a marketer and a leader in on-line display advertising that accompanies published Web sites.
While Microsoft receives access to Yahoo's search technology, Yahoo receives a big bump in annual revenues, 88% of the search-generated ad revenues from its own sites for the first 5 years of the 10-year deal, much higher than is standard in the industry.
After the takeover bid failed, the companies renewed talks about a partnership in the summer of 2008. The talks included a discussion of a large up-front payment from Microsoft. But when Ms. Bartz became Yahoo's CEO at the beginning of 2009, the company's emphasis shifted. She was more interested in steady revenue to ensure the longer-term financial health of Yahoo instead of a big one-time payment. Yahoo estimates that after the partnership is fully in place, the company's operating income will increase by $500 million a year, based on higher search traffic and ad revenue, and a substantial drop in its investment in search technology.
Steven A. Ballmer, Microsoft's chief executive, said that Ms. Bartz had driven a hard bargain. "Look," he said, "she got 88 percent of the revenue and none of the cost."
Mr. Ballmer also said that he got something he badly wanted as well:  "I got an opportunity to swing for the fences in search."
When it made its initial takeover offer in February 2008, Microsoft said it wanted to buy Yahoo to compete more effectively with Google in online search and advertising, two related markets where Google is the runaway leader. Both Microsoft and Yahoo have spent billions trying to best Google in search and advertising, and both have failed so far.