Google Inc. settled a major patent dispute with rival Yahoo Inc. yesterday for about $328 million in stock, removing a legal threat to its online search business and eliminating some of the uncertainty surrounding its impending initial public offering.
In exchange for 2.7 million shares, Yahoo dropped its two-year-old lawsuit, which had alleged that Google infringed on Yahoo's patents for the technology that matches advertising with Internet search results. Google relies on that advertising for more than 90 percent of its revenue.
"We are very pleased to have resolved these issues and with the terms of the agreement," said Google spokesman Steve Langdon.
Google, which has been highly profitable, said in a filing with the Securities and Exchange Commission yesterday that the settlement would force it to report a loss in the current quarter because of a one-time, non-cash charge of $260 million to $290 million.
As part of the settlement, Yahoo agreed to license the technology in question to Google for its continued use. It also agreed to drop an unrelated business dispute over the number of Google shares it had claimed to be owed under the terms of a separate agreement. While the two companies were once partners, with Google's search box appearing on Yahoo's Web site, they are now fierce competitors, battling for advertisers and the loyalty of computer users searching for information online.
At the middle of Google's estimated public offering range of $108 per share to $135 per share, Yahoo's legal settlement would total about $328 million.
Yahoo already owned about 5.5 million shares of Google as a result of an early investment in the search engine giant. In its filing with the SEC, Google disclosed that Yahoo now intends to sell an additional 1.1 million shares in the company's upcoming IPO, which would increase the total size of Google's roughly $3 billion public offering from 24.6 million shares to 25.7 million shares.
A Yahoo official said the company planned to hold on to shares worth more than $600 million following the IPO.
"We are pleased with the terms of the settlement agreement and pleased to have the resolution behind us," said Nicki Dugan, a spokeswoman for Yahoo.
Legal experts who have followed the case had predicted that it could have dragged on for years in the courts. Yesterday, David Rammelt, an attorney representing American Blinds & Wallpaper -- a company that has filed an unrelated trademark infringement lawsuit against Google -- said the rich settlement was a sign that Google recognized the damage could be immense if Yahoo had prevailed.
"I have not seen too many $250 million patent settlements this early in litigation that didn't have some merit," Rammelt said. "You can't look at this and decide it is a nuisance value settlement. It is, rather, a substantial acknowledgment by Google that it was violating the patent laws."
In its court filings, Google had asserted that it had not violated the terms of the Yahoo patents, and it did not acknowledge any liability or wrongdoing as part of the settlement. The company declined further comment on the settlement.
In its filing with the SEC, Google disclosed it still is facing several unrelated lawsuits alleging trademark infringement in the United States, France, Germany and Italy. "The risk of potential harm from such lawsuits is substantial," Google said.
Meanwhile, Google revealed yesterday that a number of the investment firms participating in its IPO are not abiding by all of the terms and conditions it had specified for the distribution of its shares in the unusual online auction it intends to conduct. Google had said investors could place multiple bids for as few as five shares, provided they registered online at ipo.google.com, and maintained an account with a brokerage house participating in the deal.
But in its SEC filing, Google said that Harrisdirect, one of the brokerage firms in the deal, would accept only bids for a minimum of 100 shares, which would cost investors about $12,500. Other firms are limiting the number of bids an investor can submit, or placing additional restrictions on bids.