The nonexclusive deal unites the online advertising businesses of Google and Yahoo and comes as a setback to Microsoft, which had been trying to acquire all or part of Yahoo to strengthen its own online business and compete better with Google.
Yahoo said it expects the deal to generate US $250 million to $450 million in operating cash flow during the first 12 months, and that it represents an annual revenue opportunity for Yahoo of $800 million. The deal is for an initial period of four years, with an option for Yahoo to extend it for a further six years.
The deal was announced after Yahoo said earlier on Thursday that it had ended its talks with Microsoft over a possible investment by the software giant. Yahoo said it ended the talks because Microsoft was interested only in acquiring Yahoo's search business, not the entire company.
"Clearly it is time to move on," Yahoo CEO and cofounder Jerry Yang said during a conference call. "We believe this agreement with Google helps us to do so by strengthening our competitive position and generating attractive financial benefits."
Yahoo will be able to choose the search term queries for which Google's advertisements will appear, and also the pages on which they appear. The deal applies to the US and Canada only and is nonexclusive, so Yahoo could cut deals with other companies and can also keep selling ads from its own Panama advertising platform.
Advertisers will pay Google for its ads that appear by Yahoo searches, and Google will then pay a portion of the revenue to Yahoo. Sourcers said that while this deal isn't quite as good as a Microsoft acquisition for Yahoo's investors, it can be regarded as the next best thing.
Yahoo and Google had been in talks over a potential deal for months. It was seen as a way for Yahoo to strengthen its advertising business and alleviate the pressure to be acquired by Microsoft. Microsoft had cited any deal with Google as a potential deal-breaker in its talks with Yahoo. It had also called it a bad business decision that would only serve to strengthen Google, the online ad market leader.