Summary:

As was first tipped last week, Microsoft (NSDQ: MSFT) has confirmed the acquisition of semantic search engine Powerset. The announcement was…

imageAs was first tipped last week, Microsoft (NSDQ: MSFT) has confirmed the acquisition of semantic search engine Powerset. The announcement was made this afternoon in posts on Microsoft’s Live Search blog, as well as on the Powerset blog. Terms of the deal were not disclosed, but initial reports pegged the transaction at somewhere above $100 million. The SF-based company has raised $12.5 million at a rumored $42.5 million valuation from Foundation Capital and The Founders Fund and various individual investors.

Microsoft isn’t buying Powerset because it’s found any traction yet in the marketplace. So far all the site does is allow a user to search Wikipedia with a natural language query. But as Microsoft looks for an avenue to make inroads against Google (NSDQ: GOOG), it hopes that the semantic or natural language approach will yield fruit. So far, this has been an areas with a lot of hype but little to deliver in. Perhaps with Microsoft now making a (small) bet on it, it can really be tested in the market. The announcement tries to cast doubt on the quality of today’s search technology: “We know today that roughly a third of searches don’t get answered on the first search and first click. Usually searchers find the information they want eventually, but that often requires multiple searches or clicks on multiple search results.”

In addition to the core technology, the deal brings in industry bright minds, including founder and CTO Barney Pell. The company will become part of Microsoft’s core search relevancy team, though it remains to be seen how much is incorporated into the actual Live Search product. It fits with the company’s ethos that the key to winning a given battle is to out-R&D the competition, something it can do against pretty much any competitor.

What does this mean for Yahoo? Probably not much. If given the opportunity to snag Yahoo’s (NSDQ: YHOO) search business at the right price, this wouldn’t stop Microsoft, which would like to gain scale as much as it needs technology. People are pointing out that Yahoo is back to around $20 today, closing in on where it was before the Microsoft bid. However, Microsoft is below $27, which is the lowest it got in the months following the Yahoo bid. Sure, Yahoo is cheap again, but Microsoft’s own currency should have it feeling like an American on a European vacation.

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