RealTime IT News

Microsoft Deal Looking a Little Sweeter for Yahoo?

New details emerging from Microsoft and Yahoo's ten-year search and advertising partnership suggest that Yahoo may be getting a better deal than it initially appeared -- potentially upping its take as the agreement progresses.

The agreement will also see more than money changing hands. Microsoft (NASDAQ: MSFT) also plans to take on 400 employees from Yahoo (NASDAQ: YHOO) as part of the agreement, according to documents filed with the Securities and Exchange Commission (available here in PDF format).

Those same documents indicate that the deal may offer Yahoo more flexibility and a higher share of advertising revenue than had been previously thought.

The chance for a larger payoff could be important for the pioneering Web portal, considering that investors reacted coolly to the blockbuster announcement last week, in part because it didn't bring a huge upfront payment to Yahoo many had been looking for.

Through the deal, which would see Microsoft take over the technology platform behind searches on Yahoo's sites, the software giant also agreed to pay Yahoo $150 million over the first three years, meant partially to defray the transition costs associated with the arrangement.

That's a far cry from the $1 billion-plus some had been expecting Microsoft to fork over for Yahoo's search business.

Since then, executives from both companies tried to play down the significance of an initial cash payout, focusing instead on the generous revenue-sharing terms of the deal. Microsoft agreed to pay Yahoo 88 percent of the revenue gleaned from ads served on its search pages, known as traffic-acquisition costs, or TAC, for the first five years.

Heftier payout

In Yahoo's Tuesday filing with the SEC, it revealed that the TAC rate will jump to 93 percent for the second half of the deal if Microsoft terminates the provision that gives Yahoo exclusive rights to the global sales operations for premium search ads.

If Microsoft tries to exercise that clause, but Yahoo exercises an option to retain its exclusive sales agreement, its TAC rate would drop to 83 percent. TAC paid to Yahoo would bump up to 90 percent if Microsoft declined to terminate the exclusive sales provision and the terms of the deal remained unchanged.

In addition to the 400 Yahoo employees Microsoft agreed to take on, the software giant also said it would fund a retention plan to keep them from jumping ship during the as the companies integrate their engineering platforms. It also agreed to subsidize the salaries of 150 Yahoo employees to help with its own transition.

The deal also preserves for Yahoo "full flexibility with respect to the user experience, content and look and feel on all of its Web pages," according to the filing.

Yahoo has the option to incorporate Microsoft's mapping and mobile search services through the deal, but would not be locked into them the way it would be with PC search.

Microsoft would also provide an unspecified minimum guarantee for revenue per search from Yahoo's sites. If Microsoft's payouts fail to meet the minimum, Yahoo would be entitled to terminate the deal.

Standard & Poor's analyst Scott Kessler said the additional commitments from Microsoft were an "incremental positive" for Yahoo, reiterating his firm's "buy" opinion on the company.

Yahoo and Microsoft will need to secure regulatory approval before the deal is put in place, a process they hope to accomplish in the first half of next year. At that point, they are hoping to have the integration of their sales and technology operations completed within two years.

In the near term, analysts are looking for Yahoo to continue its efforts to rein in costs as it repositions the business around display advertising and content.

"We believe Yahoo will become more of a margin expansion story as it focuses on execution and efficiency," Barclays analyst Doug Anmuth said in a research note.

He sees Yahoo as well positioned for a rebound in the advertising economy, and looks ahead to the company's investor day in late October for key details about its evolving strategy.

Shares of Yahoo were up more than 2 percent in morning trading.