SAN FRANCISCO -- Yahoo! Inc., the owner of the world's most-used Internet sites, said yesterday it will buy Overture Services Inc. for $1.63 billion to increase revenue from Web searching, a fast-growing area where Google Inc. has emerged as the leader.
Yahoo, based in Sunnyvale, Calif., will pay 0.6108 share of its stock and $4.75 in cash for each Overture share, the companies said in a statement. That values Overture shares at $24.41, a 13-percent premium over their closing price Friday.
The deal's value will fluctuate with Yahoo's stock until its expected closing date in the fourth quarter.
Overture's shares rose $2.54 to close at $24.05 yesterday on the Nasdaq Stock Market, where Yahoo's shares gained 1 cent to close at $32.20.
The acquisition continues a recent flurry of dealmaking in the lucrative business of online searching, a crucial axis on which so much of the Internet's utility depends.
By buying Overture, Yahoo gains control of one of its most important business partners and strikes a blow against Google and Microsoft.
A fierce rival of Google, which offers ad-based results distinct from its popularity-based search rankings, Overture now threatens to become more formidable by tapping into Yahoo's greater resources, which included $1.1 billion in cash as of June 30.
Yahoo chief executive officer Terry Semel is increasing his investment in sponsored-search advertising, where businesses can pay to have their Web sites listed at the top of Internet-search results. The market for sponsored-search ads is expected to grow about 35 percent annually to $5 billion in 2006 from $2 billion this year, Yahoo said, citing a forecast by U.S. Bancorp Piper Jaffray.
"Sponsored search is a major growth driver for Yahoo," said Anthony Valencia, an analyst at TCW Group Inc. in Los Angeles. TCW held more than 16 million Yahoo shares in March, according to regulatory filings.
Yahoo said it expects the acquisition of Overture to be at least break-even in 2004 and add to earnings and cash flow thereafter, chief financial officer Sue Decker said in an interview.
Yahoo already has a partnership with Pasadena, Calif.-based Overture that lets businesses bid against each other to have their Web sites placed at the top of search listings.
By entering "Tour de France" into Yahoo's search engine, for example, the first listing is a sponsored-search ad, provided by Overture, for a page on auction service EBay Inc. that offers collectibles relating to the bicycle race.
Sales of sponsored search ads contributed more than half of Yahoo's 42-percent gain in second-quarter revenue, Jeetil Patel, an analyst at Deutsche Bank in San Francisco, wrote in a note to clients last week.
Owning Overture's technology will allow Yahoo more quickly to place sponsored-search listings elsewhere in its group of Web sites, Yahoo said. In addition to selling ads on its search page, Yahoo said it wants to place sponsored search ads in sections devoted to shopping, travel, sports news and real estate and auto listings.
Yahoo said it will sell other forms of advertising and services, such as Web-site hosting and links to online stores, to Overture's advertising clients.
And Yahoo will expand its sponsored search service overseas to regional Web sites targeting users in Europe, Korea and Japan.
Yahoo's Web sites, which include services such as e-mail and news, as well as its search engine, are the most visited in the world, according to research firm Nielsen//NetRatings. Still, Google's Web site gets more visitors for searches, analysts have said.
In the U.S., 32 percent of Web searches were done on Google's Web site in May, compared with 25 percent on Yahoo, according to ComScore Networks Inc.
Semel has been trying to improve Yahoo's search engine to win back traffic from Google and others. He bought search-engine maker Inktomi Corp. in March to gain its technology and had Yahoo's search page redesigned in April. Yahoo is also running a national advertising campaign to promote its search engine.
The company that became Overture was started in 1998 by Internet investor Bill Gross. Overture became profitable in 2001, although it lost contracts to Google last year to provide sponsored search for advertising to Web sites, including AOL Time Warner Inc.'s America Online service. Overture reduced its 2003 profit forecast earlier this year.
The acquisition "makes terrific sense for Yahoo," Semel said. "It makes us the largest, most integrated advertising company on the Internet on a global basis."
With Associated Press reports
