Yahoo confirms deal with Microsoft

While the markets reacted negatively to the new deal to combine search engines, with Yahoo shares falling 12 per cent, most agreed that the alliance is the only way to create a viable rival to industry leader Google.

Microsoft shares gained slightly as analysts concluded that it had got the better of Yahoo in the tie-up and stands to do well out of the agreement.

Curently Google has 65 per cent of the search market and the new Yahoo/Microsoft alliance will have around 30 per cent.

The deal hammered out by the two firms will last for 10 years and will involve Yahoo ceding its search business to Microsoft, with the latter's recently-launched Bing product becoming the sole engine. In return Yahoo will gain advertising customers, to which it can sell its services. Some analysts expressed doubts that the model would work for Yahoo in the longer term, saying that it may fall into the same traps as media groups like Time Warner or AOL.

Yahoo chief executive Carol Bartz, who has been in place for only six months, responded to criticism of the deal, saying: "If you got the chance to offer the same service at no cost, you’d be crazy as a business leader not to do that."

However Yahoo investors were disappointed in the lack of any initial lump sum payment from Microsoft and the $500m addition to operating profit instead of the billions that had been expected to come.

There had been initial concerns that anti-trust regulators may have been against such a big tie-up, but those worries look to be overdone, given that the deal finally creates a viable alternative to Google's search dominance.

WHAT THEY ARE SAYING:Lex in the FT: "Google ... will benefit from wearing a petticoat of competition while it continues to rake in cash. With two-thirds of the US search market, and more worldwide and in paid search, its dominance will remain untouched for years, if at all."

Josephine Moulds and James Quinn in the Daily Telegraph:  "Will the new alliance seriously dent Google's dominance? Former Wall Street analyst turned blogger Henry Blodget said on his Business Insider website that it could, ironically, be positive for the market leader. He argued that Google would be able to stride ahead while Yahoo! and Microsoft were mired in legal and regulatory purdah for the next six to 12 months, not to mention the strains of an unhappy marriage." ·