Well.. this is Big. The OS giant Microsoft has joined hands with Yahoo to beat Google in it’s own game. Google has been a phenomenal headache for the then Yahoo search and now Microsoft also. But no fear now as Both the giants have announced a 10-year agreement to improve the Web search experience for users and advertisers.

Microsoft will acquire an exclusive 10-year license to Yahoo!’s core search technologies, and Microsoft will have the ability to integrate Yahoo! search technologies into its existing Web search platforms. In simple terms, Microsoft will now power Yahoo! search while Yahoo! will become the exclusive worldwide relationship sales force for both companies’ search advertisers.

Microsoft’s Bing will be the exclusive algorithmic search and paid search platform for Yahoo! sites. Yahoo! will continue to use its technology and data in other areas of its business such as enhancing display advertising technology. Self-serve advertising for both companies will be fulfilled by Microsoft’s AdCenter platform, and prices for all search ads will continue to be set by AdCenter’s automated auction process.

Each company will maintain its own separate display advertising business and sales force. Under the agreement, Yahoo! will innovate and ‘own’ the user experience on Yahoo! properties, including the user experience for search, even though it will be powered by Microsoft technology. Microsoft will compensate Yahoo! through a revenue sharing agreement on traffic generated on Yahoo!’s network of both owned and operated (O&O) and affiliate sites. Yahoo! will continue to syndicate its existing search affiliate partnerships.

Microsoft will pay traffic acquisition costs (TAC) to Yahoo! at an initial rate of 88 per cent of search revenue generated on Yahoo!’s O&O sites during the first five years of the agreement. Microsoft will guarantee Yahoo!’s O&O revenue per search (RPS) in each country for the first 18 months following initial implementation in that country.

The agreement does not cover each company’s Web properties and products, e-mail, instant messaging, display advertising, or any other aspect of the companies’ businesses. In those areas, the companies will continue to compete vigorously.

At full implementation (expected to occur within 24 months following regulatory approval), Yahoo! estimates, based on current levels of revenue and current operating expenses, that this agreement will provide a benefit to annual GAAP operating income of approximately $500 million and capital expenditure savings of approximately $200 million. Yahoo! also estimates that this agreement will provide a benefit to annual operating cash flow of approximately $275 million.

The transaction will be subject to regulatory review. The companies expect the deal to close in early 2010.