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Yahoo CEO Carol Bartz, Microsoft CEO Steve Ballmer

After eighteen months of meetings, talks and threats of a hostile takeover by the software giant, Microsoft and Yahoo have finally reached an amicable deal that is designed to loosen Google’s grip on the Internet search market.

Under the terms of the new deal, projected to run for 10 years, searches on Yahoo will now be powered by Microsoft’s recently released new search engine Bing, while it will apparently be Yahoo’s primary responsibility to attract premium advertisers away from the Google world.

Microsoft has agreed to pay Yahoo 88% of the revenue gained from searches on Yahoo owned sites, something that Yahoo executives say should increase their operating income by about $500 million every year.

For their part, Microsoft’s CEO Steve Balmer said the hopes the deal will “create more innovation in search, better value for advertisers and a real choice for consumers in a market currently dominated by a single company”.

The deal between the two companies has been a rocky work in progress since February of 2008 when Microsoft made a $44.6 billion bid for Yahoo, an unsolicited move that Yahoo rejected within a week, saying that the $31 per share proposal massively undervalued their company. Microsoft then threatened to take its deal, which was upped to $33 per share to Yahoo stock holders directly, but before that ever happened Microsoft did a complete U turn and by May 2008 dropped the bid altogether, citing economic concerns.

The remainder of 2008 did not go well for Yahoo. The credit crisis forced a layoff of 10% of their workforce in October and by December the value of a Yahoo share had fallen to $9.

When new Yahoo CEO Carol Bartz took over in January 2009 she immediately seemed to reopen the door to a partnership with Microsoft saying while she would not allow the company to be sold outright she was open to a sale of the company’s floundering search business.  Since then industry pundits had predicted that the deal that was announced on Wednesday would indeed become a reality.

The deal is still subject to regulatory red tape, a process that means the partnership may not go into effect until the end of the year. There are some concerns on the part of Microsoft executives, especially Steve Ballmer, who in a Harry Potter like moment, refused to mention Google by name, referring to them only as “the competitor”, that lobbyists acting for Google, who currently have a whopping 65% share of the search market, will delay the proceedings even further, perhaps since it was Microsoft who were the main opponents against a failed deal between Yahoo and Google last year.