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Jul 17, 2009

The long-sought deal is reportedly near for Yahoo Inc. and Microsoft Corp. to collaborate on Internet search technology and advertising.

Microsoft and Yahoo sources, and Wall Street analysts, are saying a search and online advertising deal between the two companies is imminent and could be announced as early as next week.

Top Microsoft executives — including Yusuf Mehdi, senior vice president of the Online Audience Business Group; Satya Nadella, senior vice president for research and develop in the Online Services Division; and Qi Liu, president of the Online Services Division — traveled Thursday to Silicon Valley to smooth out technical issues, reported All Things Digital, the Wall Street Journal's technology blog.

Microsoft CEO Steve Ballmer is reportedly deeply involved with the talks.

Wall Street analyst William Morrison, of the investment house ThinkEquity, said his firm considers a Microsoft-Yahoo search deal "imminent," reported 24/7 Wall Street.

And one close source told All Things Digital's Kara Swisher, "It is down to the short strokes, for sure, it is just a question if we can finally close this."

Several reports indicate that the deal would involve Microsoft's paying upfront "big boatloads of money," as Yahoo CEO Carol Bartz called for in May, before a search-revenue sharing model that initially would favor Yahoo. 24/7 Wall Street's sources said the deal involves a $3 billion upfront payment.

That revenue-sharing must add up to a lot of money, considering Yahoo rejected Microsoft's $47.5 billion takeover bid last year.

"Microsoft needs Yahoo less than they did a year ago," Danny Sullivan, search-engine guru and editor-in-chief of Search Engine Land, told seattlepi.com. "I still feel like Microsoft could get by without Yahoo. I think Yahoo has stalled in some way, and people don't know if it's going to still be there."

Microsoft's search engine, Bing, has seen small traffic increases since launching at the beginning of June. According to comScore, it fielded 8.4 percent of Web searches in June, up from 8 percent in May but down from 9.2 percent in June 2008.

Compare that to Yahoo's 19.6 percent in June 2009, and Google's whopping 65 percent.

"They're nowhere near (Google) right now," Sullivan said. "So (a deal) at least gets them closer."

To Sullivan, the only way to compete with Google is to be the alternative to Google. And right now, that's largely Yahoo's role, he has said.

If Microsoft is out for blood — and why wouldn't it be? — its goal, at least in the short term, should be to become No. 2 in search.

"If you're going to solidify being No. 2," Sullivan said, "there's no better way than buying No. 2."

A deal would benefit both companies, analysts say. 24/7 Wall Street predicts Yahoo's shares could jump $4 to $5.

Yahoo's search engine lost its dominance years ago. And a report released yesterday by search-engine marketer Efficient Frontier showed advertisers' return on investment on Yahoo fell over the past year, while it increased significantly on Google and Bing.

Sullivan said that if Yahoo sells its search operation to Microsoft, it runs the risk of losing its audience and becoming another AOL.

The deal would unquestionably give Microsoft a huge boost. The Redmond-based company never got rolling in the search-engine market, and employees now admit that most of the public never even knew the name of Live Search.

Microsoft is putting a lot of muscle behind the launch of Bing, spending at least $80 million on advertising and dedicating 5 to 10 percent of the company's operating budget to Bing for up to five years, as Ballmer said last month.

And in recent weeks, both CEOs have suggested they were open to some sort of Microsoft-Yahoo partnership.

"I didn't expect them to give up acquiring (Yahoo)," Sullivan said. "It makes sense at the right price."
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