Yahoo to buy Overture for $1.63 b

LOS ANGELES: Yahoo Inc. said it would buy online advertising provider Overture Services Inc. for $1.63 billion in cash and stock to strengthen Yahoo's ad business and ward off a growing challenge from search engine Google.

Yahoo, which derived about 14 percent of its net revenue in 2002 from its partnership with Overture, said the deal would make it the largest global player in Internet advertising.

Both companies compete with privately held Google, the search engine with its own advertising platform.

The deal underscored the growing potential of the pay-for- performance search market, the strongest part of the Internet advertising business, analysts said.

Overture, like Google, charges companies to place links to their products and services prominently at the top of related search results. Both are also working to place relevant ads within targeted pages of Web content.

Privately held Google, widely seen as a candidate for a blockbuster initial public offering, declined to comment.

Yahoo's stock has gained about 97 percent this year, making it a richer currency for the acquisition but also prompting many analysts to question whether the blistering rally in Internet shares has left the stock overvalued.

According to research by comScore's qSearch service, in May, 32 percent of Internet searches were performed on Google, compared to 25 percent for Yahoo. Google also had a 54 percent share of searches served by a paid search system, as opposed to 45 percent for Overture.

"There was a very strong and rich rivalry between Google and Overture," said Matthew Berk, an analyst at Jupiter Research. "Now, (Yahoo's) actually partnered up with Google's biggest competitor."

TERMS OF THE DEAL

"I think Yahoo got a fair price," said Kaufman Bros. analyst Richard Fetyko. "With one clean swoop it became Google -- a leading search provider, commercial search listing, and portal."

Yahoo said it would exchange 0.6108 share of Yahoo stock and $4.75 in cash for each share of Overture, for a total of $1.63 billion, including Overture's cash balance. Yahoo said it would exchange 66.78 million Overture shares.

Overture will become a unit of Yahoo when the deal is completed in the fourth quarter. Ted Meisel, Overture's CEO, will continue to head up Overture's operations and report to Yahoo COO Dan Rosensweig.

Based on Yahoo's Monday closing price of $32.20, the deal's cash and stock components value Overture at $24.42 a share. Overture shares jumped almost 12 percent to $24.05 on Monday. Yahoo shares ended up 1 cent at $32.20 in Nasdaq trading after earlier falling as low as $31.51.

Credit Suisse First Boston advised Yahoo on the deal while Overture was advised by Goldman Sachs.

Speculation that other Internet search providers could become acquisition targets drove up shares of LookSmart Ltd. , FindWhat.com, InfoSpace Inc. and Ask Jeeves Inc.

Yahoo said it would issue the equivalent of about 7 percent of its stock to pay for the deal, which is expected to break even in the first year and add to Yahoo's profits thereafter.

The cash part of the deal is worth about $317 million, based on the share-count figures provided by Yahoo. Yahoo ended the last quarter with about $1.08 billion in cash.

MSN CONTRACT EYED

One possible pitfall to the deal, analysts said, is that one of Overture's biggest customers, Microsoft Corp.'s Internet service MSN, could cancel its contract.

"I would be worried that the other major partner of Overture, which is MSN, would now make moves to have their own paid search platform -- organically or buy another," said Troy Mastin, analyst for William Blair & Co.

Overture's Meisel told Reuters Microsoft has the right to abandon its contract if Overture undergoes a change of control. But Yahoo Chief Executive Terry Semel said the status of Overture's relationship with Microsoft was not a main concern at the moment.

Sue Decker, Yahoo's chief financial officer, told analysts the company was committed to maintaining Overture's affiliate contracts. But Decker also said Yahoo did not need customers like MSN to make the deal work.

MSN did not tip its hand. "It's really too early for us to speculate what we might do," MSN group product manager Lisa Gurry told Reuters. "At this point in time, it certainly won't change the relationships in the short term. We'll talk to Yahoo and Overture."

Both Semel and Meisel told Reuters it was too early for them to make decisions on staffing and on Overture's own recent acquisitions, like the Web portal AltaVista.

© Reuters