Yahoo is leveraging its high share price to fund the acquisition of Overture Services. If the deal goes through, Yahoo would own the sponsored and algorithmic search engines used by its main rival, Microsoft's MSN. Eyes are now on Microsoft, which may now be looking to buy a search provider itself.
Yahoo has said it will pay 0.6108 of a share and $4.75 cash for every share of Overture, valuing the company at $1.63 billion.
Yahoo CEO Terry Semel said Yahoo will start to use Overture's pay-per-click text ads across more of its web properties. Overture currently provides sponsored search results, but Yahoo will use the ads elsewhere, such as in its shopping channel.
The agreement also means that Yahoo will own some of the best web search technology available, and will have the early patents to back it up. The company bought Inktomi in December, and Overture owns AltaVista and Fast Search.
The deal increases the already significant likelihood that Yahoo will sever ties with Google as soon as feasible and start to compete head-to-head. Google currently provides the pure algorithmic search part of Yahoo's search offering.
It also means that Yahoo will own both the sponsored and algorithmic search services used by MSN, its main competitor. MSN uses Overture for sponsored listings and Inktomi for algorithmic search.
Yahoo CFO Sue Decker gave the suggestion that the company has considered that MSN may cease to be an affiliate, in her explanation of financial models used to assess the effects of the transaction.
The ball is essentially now in MSN's court. It has some very early-stage algorithmic search developments underway, as evidenced by the MSNBot crawlers showing up in web server logs around the world, but no announced sponsored search plans.
This raises the possibility that further consolidation could be likely. Public companies playing in sponsored search include LookSmartWhich also has algorithmic search) and FindWhat. Ask Jeeves, which uses Google for sponsored search, is also a potential target, as is Google itself, although the thought of Microsoft buying Google would be enough to give millions of geeks nightmares for months.
Datamonitor is offering Reg readers some of its technology research FOC. Check it out here.