Yahoo! and Microsoft signed a 10 year agreement in which Microsoft will license Yahoo’s core search technologies, and Microsoft’s Bing will become the exclusive algorithmic search and paid search platform for Yahoo sites.

Under the agreement, Yahoo! would focus on its core business of providing consumers with great experiences with the world’s favorite online destinations and Web products. The companies expect the closing to occur in early 2010.

Microsoft will pay traffic acquisition costs at an initial rate of 88% of search revenue generated on Yahoo sites for the first five years. Yahoo sees the deal lifting annual operating income by around $500 million and capital expenditure savings of $200 million. Yahoo sees an annual operating cash flow benefit of $275 million.