Google to pay Yahoo over patent row

Reed Stevenson

SEATTLE: Google Inc. again boosted the number of shares it plans to sell in its initial public offering, saying it will issue 2.7 million shares to Yahoo Inc. to settle a lawsuit over technology used to display ads.

As a result of the settlement, which could be worth as much as $290 million, Google will boost the number of shares in its IPO to 25.7 million from 24.6 million. The settlement comes after Google, the Web's No. 1 search engine, disclosed last week that it may have illegally issued shares to current and former employees and consultants.

The latest developments come amid concerns over Google's growth prospects, pricey market value and a complex IPO process. The company has not set a date for the IPO that many on Wall Street were expecting as soon as soon as this week, although Google reiterated in Monday's filing that it expects to go public this month.

"On the one hand, this clears up some questions for investors, but at the same time, the market has been bad, Internet stocks have been bad, and I think, so far, there's been lukewarm response in investing in Google," said Tom Taulli, co-founder of Current Offerings, which tracks IPOs.

Google said in a filing with the U.S. Securities and Exchange Commission, that it expects the Yahoo settlement to result in a charge of $260 million to $290 million, based on its expected share price at the IPO, leading to a net loss for the current quarter ending in September.

Yahoo, which could see nearly $150 million from its share of the increased IPO, agreed to drop a patent lawsuit that its subsidiary Overture Services filed against Google in 2002 for infringing on a patent. The patent was entitled "system and method for influencing a position on a search result list generated by a computer network search engine."

Yahoo and Google also resolved a dispute over stock issued under a 2000 agreement between the two companies.

Google declined to comment beyond an issued statement and the SEC filing.

AT WHAT PRICE?

Under terms of the settlement, Google will license a patent held by Overture Services, which Yahoo acquired last year. The dispute over that patent had threatened Google's lucrative AdWords program, which serves up ads with search results linked to certain keywords.

Google receives nearly all its revenue from sales of advertising related to its searches, but experts said the patent in question was no longer a core part of the technology behind Google's search engine.

"It's not the secret sauce," said Martin Pyykkonen, analyst at Janco Partners.

"You also have to believe that they (Google) believe that the market can absorb the increase in the shares," Pyykkonen said, "The issue is not absorbing the shares, but the obvious question is at what price?"

A source told Reuters Google may delay its IPO until next week after taking bids this week so the company and its underwriters can ensure fund managers will be able to register to buy shares.

At its expected per-share price range of $108 to $135, Google's IPO could raise as much as $3.47 billion and value the six year old company at $36.6 billion.

Google won't be priced by its bankers, but rather by the market itself through an auction process, a decision the company's founders made to make the stock more accessible to everyday investors that has irked some larger investors.

"Pricing it aggressively from the get go, I think, is harming the chances for this IPO," Taulli said.

Google increased the number of shares in its public offer amount because of an increase in the number of shares that Yahoo, an early investor in Google, will sell to the public. Yahoo said it will sell up to 1.6 million shares, up from its originally planned 549,888.

That would net Yahoo as much as an additional $149 million at the high end of Google's expected IPO price range, and leave the company with a 4.1 percent stake in Google. After the IPO, Yahoo will also hold 4.95 million super-voting of Google Class B shares, a 2.1 percent stake.

(Additional reporting by Ben Berkowitz and Nicole Maestri)