Microsoft-Yahoo deal contains some cash payments, escape clauses

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Microsoft offices in Bellevue, Wash. Credit: Kevin P. Casey / Bloomberg

When Microsoft and Yahoo announced their search agreement last week, many saw the deal as lopsided. Microsoft got the better end of the deal, while Yahoo either ‘mortgaged its future’ or ‘committed seppuku,’ depending on which writer you asked.

The reactions were largely based on the fact that Yahoo would basically chuck its own search technology, replacing it with Microsoft’s Bing search engine. In exchange, Yahoo would get to keep 88% of the revenue it generates from selling search ads.

That was a disappointment to investors who had expected Microsoft to also pay Yahoo up to $2 billion in cash. After all, the Redmond, Wash., software giant once offered to pay $45 billion to buy Yahoo. Instead, last week’s arrangement came up as snake eyes for the Sunnyvale, Calif., company that once dominated search.

It turns out there is some cash involved, but not a whole lot, according to a filing with the Securities and Exchange Commission released online Tuesday. Microsoft agreed to pay Yahoo $50 million a year for three years to pay for ‘transition and implementation costs.’ It also agreed to guarantee a minimum level of gross revenue per search for 18 months.

The deal calls for Microsoft to hire 400 Yahoo employees, along with another 150 to ‘assist with providing transition services.’ Yahoo had 13,000 employees at the end of June.

There is some flexibility in the arrangement. After five years, Microsoft has the option to end Yahoo’s exclusive ability to sell ads against Bing search results. If it does so, Yahoo would get to keep 93% of the revenue it generates from search ads on its sites. If Yahoo likes the arrangement so much that it wants to remain exclusive control over the sales of search ads for Bing, it would get to keep 83%.

But perhaps more than anything, the deal turns on how well the partnership’s performance stacks up against market leader Google. Yahoo can walk away if the two companies’ combined market share falls below a certain undisclosed percentage (combined, both had 28% of U.S. search queries in June; would the minimum cutoff be more than that, or less?). Yahoo can also bolt if the revenue per search on its pages falls below a certain (again undisclosed) percentage of what Google gets.

Yahoo can also cut and run if the deal is not approved by July 29, 2010.

-- Alex Pham and David Sarno