In a move that would heighten the rivalry among top-tier Internet search engines, Yahoo Inc. on Monday agreed to pay about $1.6 billion in stock and cash for Overture Services Inc., a Pasadena company that pioneered charging for prime advertising space in Internet search results.
The deal would unite two companies that have enjoyed a lucrative alliance since November 2001. It would be the latest in a series of steps Yahoo has been taking to bolster its cornerstone business to better compete with Google Inc. and Microsoft Corp.'s MSN.
Yahoo agreed to pay $4.75 in cash and 0.6108 share of Yahoo stock for each Overture share.
The cash portion of the deal totals about $313 million. The merger was approved by the boards of both companies, a Yahoo spokeswoman said, and still requires approval from Overture shareholders. The companies expect to close the deal in the fourth quarter.
Rumors that Sunnyvale, Calif.-based Yahoo would buy Overture have circulated for some time and came as no surprise to Wall Street in light of the companies' existing partnership, in which Overture and Yahoo share fees from ads that appear alongside search results on Yahoo.
"It makes complete sense. This is not a deal that should shock anybody," said Ken Marlin, managing partner of investment bank Marlin & Associates in New York.
Nonetheless, Yahoo Chief Executive Terry Semel said merger discussions occurred only recently, sparked by the surge in Yahoo's advertising business and in sponsored searches.
"The actual 'So do we get married?' came in a short period of time over the past week or two," Semel said
The deal comes as Overture -- which in April reduced its earnings estimates -- has seen its stock slide amid concerns about pressures on its profit margin.
Overture's stock, which jumped $2.54 a share after the announcement to close at $24.05, remains below the $31 range it reached in January. Yahoo gained 1 cent to $32.20 a share. Both stocks trade on Nasdaq.
"If you are an Overture shareholder, you now are going to be holding Yahoo shares, which gives you a much bigger platform and lot more opportunities," said Mark Zadell, analyst with Blaylock & Partners in New York.
Overture Chief Executive Ted Meisel said uniting with Yahoo clearly would give the company more firepower than it would have as a stand-alone firm.
"When we looked at what we thought we wanted to do in the future, we just simply felt we could accelerate our product development capabilities and our ability to serve customers by a few years," Meisel said.
Overture's 88,000 customers, through an auction process, pay to be highlighted in a Web search in much the same way a company pays for an ad in the Yellow Pages. A Yahoo search for "flowers," for example, showcases such companies as FTD and 1-800-Flowers in a separate area atop the other search results.
Companies, many of them small to medium-sized businesses, pay each month as little as $20 or as much as hundreds of thousands of dollars, depending on the number of times search engine users click on their site.
Each time someone clicks on an ad, Overture gets a fee.
In 2001, consumers clicked 1.4 billion times on ads from 53,000 advertisers, with each click generating an average fee of 23 cents. In 2002, that grew to nearly 2.2 billion clicks on ads from 80,000 advertisers that paid an average of 35 cents per click. Overture splits that fee with Web site owners, such as Yahoo.
The expected acquisition solidifies Overture as the most successful firm spawned by Idealab, the beleaguered Pasadena Internet incubator founded by entrepreneur Bill Gross, whose operation also started such notorious dot-com flameouts as EToys Inc.
Overture was originally founded as GoTo.com. According to Overture's last proxy statement, Idealab owns about 5% of the company's stock.
A group of investors is suing to try to liquidate Idealab, claiming that Gross and others squandered funds and that Idealab's incubator business is effectively dead. Idealab has argued that Overture shows the company is vibrant. Lawyer Skip Miller, who represents the plaintiffs, said the expected Yahoo deal wouldn't affect the lawsuit.
Overture's Meisel credits Gross with pushing the idea of sponsored searches amid naysayers who thought it wouldn't work. "Bill Gross developed this model, and while it all seems really obvious in hindsight, as brilliant, simple ideas often do, it was contrarian for some time. You have to give Bill Gross credit for seeing it," Meisel said.
Overture's technology is embedded in Microsoft's MSN search engine, in addition to Yahoo's. Microsoft has the right to end its deal with Overture in the event of an acquisition, and analysts speculated that the software giant probably would.
"Microsoft is not going to be pleased about their money going to one of their competitors," said Danny Sullivan, editor of SearchEngineWatch.com, a Web site that tracks the industry. "Microsoft is probably thinking that they should develop their own technology or buy a competing technology. They're the big unknown in all of this."
But Semel said it was premature to conclude that Microsoft would abandon its deal with Overture. Lisa Gurry, group product manager for MSN, said MSN planned no immediate changes. "We are looking forward to talking to both Yahoo and Overture to learn more about their agreement," she said. "Then we'll evaluate our long-term future direction.
Yahoo's ability to forge the deal is bolstered by its soaring stock price. The company's stock has nearly doubled since Jan. 1 as it continues posting strong profit increases.
The expected Overture acquisition marks the biggest move yet by Semel, the former Warner Bros. co-chief who was hired two years ago to turn Yahoo around.
Semel has been seeking to diversify Yahoo's business by boosting paid services such as online matchmaking, expanded mailboxes and job searches, while also bolstering advertising and Yahoo's search engine technology.
A spokesman for Yahoo rival Google declined to comment.