Overture to Buy AltaVista for $140 Mil.

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By: Michael Liedtke, AP Business Writer

(AP) Advertising-driven search engine Overture Services Inc. on Tuesday announced it will buy fallen Internet star AltaVista for $140 million, upping the stakes in a quest for search engine supremacy.

Pasadena, Calif.-based Overture will pay $60 million in cash and $80 million in stock for Palo Alto, Calif.-based AltaVista, which introduced a pioneering search engine in 1995.

AltaVista fell out of favor, though, after it expanded to duplicate Yahoo’s smorgasbord of online services, opening the door for search engine upstarts like Google to establish themselves.

By the time AltaVista reversed course and returned to its search roots, its business was sinking in financial quicksand.

AltaVista’s sales price reflects the depths of the company’s downfall. AltaVista was valued at nearly $3 billion in August 1999 when Andover, Mass.-based CMGI Inc. bought its 81.5% stake in the company.

CMGI doesn’t break out AltaVista’s results, but the company’s financial woes are widely known. By January 2000, AltaVista had amassed $765 million in losses, according to a Securities and Exchange Commission filing for an initial public offering of stock that never happened. The company’s continuing troubles prompted AltaVista to eliminate about 500 jobs during its past two fiscal two years, reducing its payroll to about 250 employees today.

The fate of the remaining employees hasn’t been determined although Overture plans to retain AltaVista’s management team and Palo Alto headquarters.

The Overture acquisition, expected to be completed in April, is the second significant deal in two months in the search engine industry. Just before Christmas, Yahoo! Inc. announced plans to pay $235 million for the search division of another dot-com casualty, Inktomi Corp.

Overture is counting on AltaVista’s technology to complement its main ad-driven search engine, which produces its results on how much businesses are willing to pay for a prominent ranking.

The technique has enriched Overture, which earned $73 million last year, as well as scores of other Web sites that license the ad-driven search engine, including some news sites. For instance, Yahoo this year expects to collect $200 million in revenue from ad-driven search results, with Overture’s engine driving most of the sales.

With AltaVista, Overture also will be able to sell search results derived from objective mathematical algorithms that rank Web sites based on their relevance to a query. AltaVista also offers a service that charges Web sites to explore their content more frequently to include more current information in search engine indexes.

By adding these features, Overture can offer a more comprehensive package in its intensifying duel with the Web’s most popular search engine, Google, said analyst Safa Rashtchy of U.S. Bancorp Piper Jaffray.

The acquisition also poses some risk for Overture. Without providing specifics, Overture executives said the takeover will hurt the company’s earnings this year before helping to increase profits next year.

This year’s earnings downside appeared to spook investors Tuesday. Overture’s shares rose 80 cents to close at $22.79 on the Nasdaq Stock Market before the AltaVista announcement, then dropped $1.89 in extended trading.

Adding AltaVista also might alienate Yahoo, Microsoft, and other Overture customers worried that the new search technology might be used to draw Web traffic from their sites.

Google’s popularity has become a stumbling block in negotiations to license its technology to some Web sites such as Microsoft’s MSN.com.

AltaVista’s Web site and search engine will remain open after the takeover, but only as a “test bed,” said Ted Meisel, Overture’s chief executive officer. “It’s not in our DNA to compete against our partners,” Meisel said during an interview Tuesday.

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