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TheStreet Open House

Search Party Rocks as Yahoo! Buys Inktomi

One of the few financially healthy Internet survivors just snapped up a fallen icon.

Yahoo! (YHOO - Get Report) said Monday that it's buying former Internet highflier Inktomi (INKT) for $1.65 a share, or about $250 million.

The deal, which Yahoo! says will enable it to expand its search-related business, is yet another example of how Wall Street's great expectations for Internet technology have been disappointed by realities of exhausted growth and declining stocks. The purchase price for Inktomi amounts to about 1% of its early-2000 market value. Back then, the company's $200-plus share price translated into a market capitalization of $24 billion.

Looking ahead, the deal also illustrates Yahoo!'s continued focus on making more money from its search technology. Inktomi, which originally gained prominence not only for its search engine but also for technology designed to speed up network data traffic, has focused of late on its search business, providing a search engine to properties such as Microsoft's (MSFT - Get Report) MSN and making money from businesses that pay to be included in search results.

Inktomi's shares jumped 43 cents Monday morning to trade at $1.60. Yahoo!'s shares rose 35 cents to $17.43.

Buying Access

Yahoo!, which already has a program in which businesses pay for speedy consideration to be placed in its Internet directory, says it's buying Inktomi to gain access to its search technology and its engineering expertise.

As for specific changes to be wrought by the deal, Yahoo! will add Inktomi's paid-inclusion program to its search engine product line, says Jeff Weiner, Yahoo!'s senior vice president of search and marketplace. That paid-placement service, under which specific pages on retailers' Web sites can be placed in relevant product categories, notes Weiner, is different from Yahoo's current express-consideration service and the advertiser-supported, pay-per-click search engine listings provided to Yahoo! by Overture Services (OVER).

In addition, says Weiner, Yahoo! expects to apply Inktomi's search expertise to areas outside of general Internet content, such as travel, yellow pages and shopping.

The full impact of the transaction on different companies involved with Internet search will take some time to sort out, though the deal could plausibly turn out mixed for Google. Weiner spoke positively of Yahoo!'s connection to both Overture and Google, which provides Internet search results to Yahoo!. However, he pointed out that Yahoo!'s relationship with Google is "flexible."

Yahoo!, conceivably, could use Inktomi to replace all or part of the search results it receives from Google. On the other hand, Microsoft, whose MSN portal competes with Yahoo!, may not be interested in using Inktomi's technology once it's acquired by Yahoo!, giving Google an opportunity to take Inktomi's place on MSN. Inktomi, which was a pioneer in automated Web search technology, has seen its prominence overshadowed by that of Google and its own formulas for finding relevant search results for Internet users.

End of the Line

The deal represents a dignified, if not lucrative, end for Inktomi as an independent company. Inktomi, which reported a mere $5.9 million in revenue in the fiscal year ended Sept. 30, 1997, saw revenue shoot to $224.2 million in fiscal 2000, when it reported a net loss of $27.3 million. Revenue plummeted to $112.7 million for the year ended Sept. 30, 2002, while losses jumped to $500.8 million, including more than $300 million in charges for impairment of fixed assets and intangibles.

The rise in Inktomi's revenue was attributable mainly to its Internet infrastructure offering, which enabled online content providers to boost the speed with which they delivered Web pages and other materials to Internet users. But by July 2002, that business had deteriorated so badly that Inktomi said it was dropping it, laying off 270 people as a result. Earlier, the company had made a big push to expand its search engine into a comparison shopping tool, but the company exited that business, too.

Unlike other Internet companies that have undergone similar setbacks -- Yahoo!, for one -- Inktomi hasn't had any turnover in the CEO post. David Peterschmidt was named CEO in 1996 and took the additional duty of chairman one year later. Peterschmidt is expected to depart Inktomi upon completion of Yahoo!'s purchase.

Yahoo! says the transaction, expected to be completed in the first quarter of 2003, will be accretive to Yahoo!'s earnings per share within 12 months of closing.

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