Yahoo! to Buy Overture

  |  July 14, 2003   |  Comments

UPDATE: The deal marks Yahoo!'s boldest move in search, scooping up paid search pioneer Overture for $1.6 billion.

Yahoo on Monday morning shook up the booming search industry with plan to acquire Overture Services in a stock and cash deal worth $1.6 billion.

Under terms of the deal, Overture shareholders will receive .61 shares of Yahoo stock and $4.75 in cash for each share they own, making the purchase price around $1.6 billion. Overture will become a wholly owned subsidiary of Yahoo. The transaction is expected to close in the fourth quarter.

The deal marks the apogee of Yahoo CEO Terry Semel's drive to focus the company on solidifying its leadership in the search sector. Last December, Yahoo bought algorithmic search provider Inktomi for $235 million

"This combination of companies really positions Yahoo as the largest player in the rapidly growing Internet advertising market," said Jeff Weiner, Yahoo's senior vice president for search and marketplace. "Pay-for-performance [search] is one of the fastest growing and dynamic segments."

The blockbuster deal will dramatically and immediately reshape the red-hot search sector. With Overture part of Yahoo, its relationship with MSN is likely to end. In addition, the deal now more clearly sets up Yahoo and Google as rivals. While Google is still signed up to provide the portal's search functions, industry analysts expect Yahoo to migrate its search functions over to Inktomi's system. Yahoo and Google signed a "long-term" non-exclusive contract in June 2000. MSN has a deal for Overture to provide paid listings through 2004.

"It definitely shifts the nature of the battle," said Gary Stein, an analyst with Jupiter Research, which is owned by the parent company of this site. "Google versus Overture was not a clear comparison, but now if it's Yahoo versus Google, that's a significant thing."

Yahoo officials said the economic rationale of the deal does not hinge on those relationships remaining intact, but Yahoo says it intends to maintain the Overture distribution network.

"We are absolutely committed to providing as much value to our affiliate partners as possible," Weiner said.

For Yahoo, the deal means it now gains total control of its search services, from algorithmic to paid search to paid inclusion. Semel has made this a goal of the company since search emerged as a major revenue generator outside of Yahoo's traditional brand advertising business. In April, Yahoo revamped its search offering, making it more integral across its network and giving users personalization options. Yahoo's commitment to search was underscored by the launch an ad campaign in May to drive usage and build its brand as an alternative to search king Google.

Last year, Overture generated $140 million for Yahoo. This year, its importance has only grown: Deutsche Bank estimates paid search accounted for 75 percent of the company's growth in marketing services' revenues in the second quarter. Although the two companies have not reveal their revenue split, it was generally believed that Yahoo kept about 70 percent. The deal will allow it to keep all of the revenues.

"Overture is a proven partner of ours," Weiner said. "Equally important, they are a pioneer in this area."

Now, Yahoo will be able to more deeply integrate paid listings into its vast network. The company said it planned to put paid search into its vertical properties, such as shopping, travel and yellow pages. Yahoo also will use Overture's recently unveiled contextual advertising product in properties like sports, real estate and autos.

Perhaps more importantly, Overture brings to Yahoo an advertiser base of 88,000, most of which are small-and medium-sized businesses. Semel has made a point of reshaping Yahoo to make it the one-stop shop for small businesses, offering everything from robust email services to Web hosting to micro ad buys. Now, Yahoo will have an entry point for moving these businesses through its funnel of higher-priced services.

"We think there's a very large, substantial opportunity there that's still a fragmented business," Weiner said. "We think we're in a position to add substantial value to small-and medium-sized businesses."

Yahoo will now have an embarrassment of riches of search technology. In addition to Inktomi, the company will gain control of addition algorithmic search capabilities thanks to Overture's acquisitions earlier this year of Alta Vista and FAST's Web search unit.

Weiner said the various search technologies are complementary, with FAST bringing robust linguistic capabilities and Alta Vista adding multimedia search technology.

Overture also brings over a host of new products, either recently released or in the pipeline. Just last month Overture released a contextual advertising product, Content Match. The company has plans to unveil a paid inclusion product in the coming weeks, in addition to designs for local search in the next year.

Finally, Overture has a growing international presence. The company plans to expand to seven markets this year, giving it operations in 11 countries.

The transaction is subject to customary closing conditions, including regulatory approval and the approval of Overture's stockholders. Overture will retain its headquarters in Pasadena, Calif., and chief executive Ted Meisel will report to Yahoo's chief operating officer, Dan Rosensweig.

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