Microsoft's proposed acquisition of the internet search and search advertising business of Yahoo! Inc will be allowed by the European Commission, the Commission said in a statement on February 18 2010.

"The Commission concluded that the concentration would not significantly impede effective competition in the European Economic Area (EEA) or any substantial part of it," the statement said.

Explaining its decision, the EC noted that Microsoft is active in the design, development and supply of computer software and the supply of related services on a worldwide basis.

The Yahoo search business subject to the transaction encompasses the internet search and the online search advertising businesses of Yahoo, including its online search advertising platform Panama.

Microsoft will acquire a 10-year exclusive license to Yahoo's search technologies. Microsoft will also hire Yahoo internet search and search advertising staff.

Microsoft will become the exclusive internet search and search advertising provider used by Yahoo.

In exchange, Microsoft will retain 12 per cent of the search revenues generated on Yahoo’s and its partners' websites during the first five years of the agreement, paying 88 per cent to Yahoo as a traffic acquisition cost.

In the EEA, Microsoft's and Yahoo's activities in internet search and online search advertising are very limited with combined market shares generally below 10 per cent, the EC said.

Google, by contrast, generally has market shares of more than 90 per cent.

According to Microsoft, acquiring the Yahoo search business and thus increasing its scale in search advertising will enable it to become a more credible alternative to Google and provide greater value to advertisers.

"The Commission's first phase market investigation has indicated that scale is an important element to be an effective competitor in search advertising," the EC said.

The EC said that it had examined the potential impact of the merger on the different market players, namely internet search users, advertisers, online publishers and distributors of search technology.

"The Commission's first phase market investigation has shown that not only market participants do not expect the transaction to have any negative effects on competition or on their business but they also expect it to increase competition in internet search and search advertising by allowing Microsoft to become a stronger competitor to Google."

The operation was notified to the Commission for regulatory clearance on January 15 2010.