The speculation that we reported on this morning that Microsoft and Yahoo had finally sealed a deal to work together has now been confirmed.

Under the terms of the agreement, Microsoft will power Yahoo search while Yahoo will become the sales force for both companies' search advertisers.

As a result, some of Yahoo's search employees will move to Microsoft, some will be moved to other areas of Yahoo's business, and others will face redundancy.

The deal comes over a year after Yahoo's co-founder and then CEO Jerry Yang rebuffed a $47.5 billion bid for the company from Microsoft, earning the wrath of many of the company's shareholders.

Microsoft CEO Steve Ballmer said the agreement will provide Microsoft's search engine, Bing, the scale necessary to more effectively compete, attracting more users and advertisers, which in turn will lead to more relevant ads and search results.

"Through this agreement with Yahoo, we will create more innovation in search, better value for advertisers and real consumer choice in a market currently dominated by a single company," said Ballmer, who in a subsequent conference call said he expected opposition from that very same single company - Google.

"Success in search requires both innovation and scale. With our new Bing search platform, we've created breakthrough innovation and features. This agreement with Yahoo will provide the scale we need to deliver even more rapid advances in relevancy and usefulness. Microsoft and Yahoo know there's so much more that search could be. This agreement gives us the scale and resources to create the future of search."

Yahoo's new role

As well as selling ads across both search sites, Yahoo will now focus on its "core business of providing consumers with great experiences with the world's favourite online destinations and web products," according to a press release from Microsoft.

This deal "establishes the foundation for a new era of internet innovation and development," added Yahoo CEO Carol Bartz, while, according to Roy Bostock, Chairman of Yahoo Inc, fitting "the long-term strategic direction of Yahoo to remain the world's leading online media company."

The agreement, which will last 10 years and is expected to be finalised in early 2010, does not cover each company's web properties and products, email, instant messaging, display advertising or any other aspect of the companies' businesses. In those areas, the press release states, "the companies will continue to compete vigorously."

"This is a significant opportunity for us. Microsoft is an industry innovator in search, and it is a great opportunity for us to focus our investments in other areas critical to our future," Bostock concluded.