Yahoo Inc. yesterday announced plans to buy Internet advertising firm Overture Services Inc. for $1.63 billion in stock and cash in a move designed to help the online giant exploit the growing market for sponsored search results.
The deal -- one of the biggest Internet takeovers of the year -- was made possible by Yahoo's recently rising stock price, and it suggests that consolidation in the Internet sector is picking up again as the result of the rebounding stock market.
Terry Semel, Yahoo's CEO, said the purchase will help extend Yahoo's reach into Web-search areas such as shopping, real estate, sports and travel.
(Yahoo Photo Via AP)
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Yahoo chief executive Terry Semel said in a phone interview that the deal would make his company the largest global player in Internet advertising by expanding its paid search business, which already brings in about 19 percent of the company's revenue. "We believe that the online advertising industry is in its earliest days of a great future," Semel added.
Industry analysts said the purchase reflects an attempt by Yahoo to position itself for long-term competition with Internet search leader Google, a privately held company that is both a partner and rival of Yahoo.
Overture, formerly known as GoTo.com, pioneered the approach of letting advertisers bid for the right to place their links alongside search terms and paying only when users click through to their Web site. Overture, based in Pasadena, Calif., claims 88,000 advertisers and licenses its commercial results to Yahoo, Microsoft's MSN.com and other Web portals.
Google has copied Overture's business model and claims 100,000 advertisers. It licenses its commercial search results to America Online and other Web portals.
Both Overture and Google share their per-click ad revenue with portal partners such as Yahoo and AOL. That revenue amounted to about one-fifth of Yahoo's total revenue of $321 million in the second quarter of this year and has been its fastest-growing source of income. By buying Overture, Yahoo will be able to keep all the revenue from paid search results on its pages rather than having to give a hefty cut to Overture.
"This is an economically strong pairing if ever there was one," said Matthew Berk, search market analyst for Jupiter Research. "Overture's business looks a lot healthier now, and Yahoo gets to own that profit it was sending over to Overture."
Overture sells sponsored search results to other portals besides Yahoo. Microsoft Corp.'s MSN.com is one of Overture's top customers, and analysts consider it highly unlikely the Redmond, Wash., software giant will want to continue using Overture's ad network once rival Yahoo completes the takeover. Overture's contract with MSN.com and other portals contains an exit provision if Overture's ownership changes, Overture chief executive Ted Meisel said in a phone interview.
But Meisel added that one reason Overture agreed to be acquired was so it would have the resources to develop products faster. He said Overture would soon reach out to Microsoft and the others to discuss how the merger might help their paid search business.
Lisa Gurry, group product manager for MSN.com, said Microsoft has no short-term plans to drop Overture's search results as the result of the Yahoo deal. But she added, "We do look forward to talking to Yahoo and Overture and learning more about their agreement, then evaluating the different options that we have."
For its part, Yahoo took pains in a conference call with analysts yesterday to say that while it intends to continue Overture's "affiliate" business with Microsoft and other rivals, it doesn't need Overture to sell search results to any portal besides Yahoo to make the deal profitable. Yahoo Chief Financial Officer Susan Decker said the company expects to break even on its Overture purchase in the first year and generate extra revenue in future years.
Paid search, while relatively young, has grown into a nearly $2 billion-a-year industry. Meisel said he believes it will triple over the next few years, to at least $6 billion. In addition, Semel said owning Overture will help Yahoo extend sponsored search results into other areas of Yahoo's network besides Web search, including shopping, real estate, sports and travel. Yahoo also hopes to sell other services to Overture's search advertisers, he said.
The deal is Yahoo's second major search technology purchase this year. It previously closed a deal to buy Inktomi Corp., which owns search technology similar to Google's for matching search queries with Web pages.
Overture also made several search technology acquisitions this year, picking up AltaVista's search businesses and the Web search system of a company called Fast Search & Transfer. Those purchases mean that Yahoo would own a variety of Web search systems if the Overture deal wins approval from shareholders and regulators.
Under the terms of its deal to buy Overture, Yahoo is offering 0.6108 shares of common stock and $4.75 in cash for each outstanding share of Overture. Overture said it had 66.78 million outstanding shares. Its shares jumped about 12 percent following the announcement to close at $24.05 yesterday. Yahoo's shares increased a penny, to $32.20.
