Yahoo! widens search with $1.6bn

Yahoo! yesterday agreed to buy online advertising group Overture for $1.6bn (£1bn), in the clearest signal yet that the internet sector is rebounding in confidence.

The deal is part of an attempt by Yahoo! to seize back the initiative in the online search market from Silicon Valley phenomenon Google, and to cash in on one of the fastest growing revenue spinners on the internet.

Overture is one of the leading companies offering paid-for search results to advertisers. The advertising commonly appears in small, classified-type boxes, under the headline "sponsored results", alongside the actual site listings from an online search.

As more and more internet users have become accustomed to using search engines, the market has exploded. According to the investment bank Piper Jaffray, paid-for search advertising is expected to grow from $2bn this year to $5bn in 2006.

Yahoo! is one of a handful of internet companies, also including eBay and Amazon.com, which have emerged robustly from the debris of the sector. Shares in all three have risen sharply this year, leading some to question whether investors are setting themselves up for a second fall.

The broader Nasdaq market, where many hi-tech companies are traded, has also been enjoying a strong rally in recent months.

Yahoo! has been working to diversify its revenues away from more conventional banner advertising after the market crashed with the dotcom boom's demise.

In the past 18 months or so it has successfully introduced a series of subscription-based services. In its second quarter results last week, the company said it had 3.5m users paying for services such as personal advertisements or premium email accounts, compared with 2.9m in the previous quarter. Group-wide profits more than doubled to $50.8m.

Conventional online advertising at Yahoo! is also growing again and was 44% higher than the same quarter last year, at $219m.

Google, a pure search business, has become one of the best-known brand names on the internet in a matter of years, largely through word of mouth. The company is rumoured to be planning a stock market flotation that would be one of the most eagerly anticipated in the sector since the crash in 2000.

Terry Semel, Yahoo! chief executive, said the acquisition was not about rivalling Google. "Our focus was not on any other company. It was about how we can offer the best range of services."

He added: "[Yahoo! ] is not just a search business but has many other ways to grow that Google is not involved in. This deal makes us quite a company."

Earlier this year, Yahoo paid $279.5m for Inktomi, which provides search engine software.

Advertisers in sponsored searches pay the owner of the search engine every time a user clicks on to their ad. To get on to a popular page, advertisers will bid against each other for prominence, pushing the fee still higher.

Google has claimed that advertising clients get a 2% response rate from paid-for search results, about 10 times higher than a banner ad.

Commonly, the fee paid by the advertiser is split between the website owner, such as Yahoo! and the firm that has sold the ad, in this case Overture. Last year, 14% of Yahoo's revenues came from its partnership with Overture.

Yahoo! is paying 0.6 of a share and $4.75 in cash for each Overture share. It values Overture shares at about $24.41 each, a 13% premium to the closing price on Friday.

In February, Overture acquired AltaVista, an early star of the internet that managed to lose its way, for $140m. AltaVista had begun as a pure, Google-style search engine and went through a series of transformations before returning to its roots. Analysts had questioned Overture's strategy in buying the site.