Yahoo's market value currently stands at about $24 billion. Yahoo just came off a tough quarter in search advertising, with its revenue in that niche falling 15% in the April-June period.
The two rivals began talking about a possible alliance as far back as 2005 before Microsoft intensified the courtship with last year's attempt to buy Yahoo.
It took Yahoo's current chief executive, Carol Bartz, just six months to strike a deal with Microsoft — something that neither of her predecessors, Terry Semel and Yahoo co-founder Jerry Yang, seemed interested in doing.
Shortly after her arrival, Bartz made it clear she was willing to farm out Yahoo's search engine for "boatloads of money" as long as she as thought the company would still receive adequate information about its users' interests.
"This agreement comes with boatloads of value for Yahoo, our users, and the industry, and I believe it establishes the foundation for a new era of Internet innovation and development," Bartz said.
Under the agreement, Yahoo will have limited access to the data on users' searches — which yield insights that can be used to pick out ads more likely to pique a person's interest. The value of that information is why Microsoft wants to process more search requests.
Like Yahoo, Microsoft has invested billions in its search technology during the past decade, yet remained a distant third in market share while its online losses piled up. The company's Internet services division lost $2.3 billion in the fiscal year ending in June, nearly doubling from the previous year.
Microsoft is counting on Bing, unveiled in early June, to turn things around.
Bing has been getting mostly positive reviews and picking up slightly more traffic with the help of a $100 million marketing campaign. Analysts believe Bing's successful debut pushed Microsoft to reopen negotiations so it could expose its search engine improvements to a wider audience more quickly.
"The reason the deal happened now is the recent success of Bing. I think it put pressure on Yahoo, as well as Yahoo not being able to turn it around on its own," said Gartner Inc. analyst Neil MacDonald.
Even with Yahoo's help, Microsoft still has its work cut out. Combined, Microsoft and Yahoo have a 28% share of the Internet search market in the United States, well behind Google's 65%, according to online measurement firm comScore Inc. Google is even more dominant on in the rest of the world, with a global share of 67% compared to a combined 11% for Microsoft and Yahoo.
It could be a while before Microsoft and Yahoo can begin working together because the partnership is likely to draw federal antitrust scrutiny to ensure the combination won't have an adverse effect on competition in the online ad market.
The U.S. Justice Department spent five months dissecting a proposed search advertising partnership between Google and Yahoo before concluding that it would give Google too much control over the market.
Microsoft used its lobbying muscle to spearhead the campaign against Google teaming up with Yahoo, so it wouldn't be a surprise if Google turned the tables.
Under the Obama administration, the Justice Department is promising to pore over technology deals far more rigorously than it did when the proposed Google-Yahoo partnership came up.
Just getting Yahoo to succumb to its latest advance represents a coup for Microsoft and the boisterous Ballmer, who were rebuffed for so long.