Investors are responding to Overture Services' ( OVER) buying spree with a selling spree of their own.

Overture, which has built a successful pay-per-click search engine from scratch, announced for the second time in a week on Tuesday that it was making a major acquisition to expand its Internet search business. The company said it would acquire the Web search unit of Norway-based Fast Search & Transfer, operator of the search engine, for $70 million cash plus up to $30 million in additional performance incentives.

The deal follows Overture's announcement last Tuesday that it was acquiring AltaVista, the once-pioneering and now-faded search business owned by CMGI ( CMGI) for $140 million in stock and cash.

Overture says the two transactions will expand its business opportunities and improve its technology, while outsiders speculate that a key motivator for the deals is to keep certain technology out of the hands of current and potential competitors.

Whatever the factors behind the purchases, the deal will certainly penalize earnings next year, just as Wall Street is turning a closer eye on Overture's financial progress. Investors sent Overture shares down to 52-week lows Tuesday. At midafternoon, they were down $2.12 at $15.25, a drop that adds to last Tuesday's 20% haircut following the AltaVista deal. Overture's shares are now trading at half their price of six weeks ago.

Reaching Out

At issue for investors are the costs, benefits and implications of the deals, which will expand Overture's operations beyond what has been its core business. Until now, Overture has focused on pay-for-performance search, which enables advertisers to bid on specific search terms they believe potential customers would be typing into a search engine. Highest bidders for specific terms, such as "Arizona vacation," receive the most prominent listings among search results; advertisers pay only when Internet users click on their listing to visit their site.

As a result of the new deals, Overture says it will be able to offer two new types of search products: One is algorithmic search, or listings in which order is determined not by payment, but by relevance based on proprietary formulas as applied in an automated process. The other is paid inclusion, in which businesses pay for their sites to be regularly examined for inclusion in an algorithmic search engine, though placement isn't guaranteed.

Both AltaVista and FAST operate algorithmic search engines and offer paid inclusion services.

On a conference call with analysts Tuesday, Overture chief Ted Meisel said the deal would ensure that the company has "a full search solution" for online affiliates who want it. "Overture is positioned to build and syndicate the best, most powerful search experience on the Internet, bar none," he said.

Other payoffs of the deals, indicated Meisel, are AltaVista's patent portfolio, FAST's "extremely well-engineered, cutting-edge" technology platform, and FAST's presence in Europe and other international markets, into which Overture has been speeding up its expansion.


The all-in-one strategy makes sense, says Danny Sullivan, editor of, a Web site that focuses on the search engine industry. The company likely lost partnership agreements with EarthLink ( ELNK) and AOL Time Warner's ( AOL) U.S. America Online service last year because it couldn't offer both pay-per-click and algorithmic search services, Sullivan says. Both those losses hammered Overture's stock.

But if that were the only motivation, says Sullivan, a purchase of either FAST or AltaVista -- not both -- would have sufficed. "Buying two is overkill," Sullivan says. Acquiring one company, he says, would have helped Overture complete the puzzle in its business. "To have both of them is a piece that someone else needs to complete their puzzle."

That someone else, says Sullivan, could be either a competitor, such as European pay-per-click search engine operator Espotting, or an Overture customer, such as Microsoft's ( MSFT) MSN.

How MSN and Yahoo! ( YHOO) react to the deal is evidently a major concern of investors. Yahoo! recently signaled its own entry into the algorithmic search business with a deal to acquire Inktomi ( INKT), and Microsoft was rumored to be interested in making its own algorithmic search acquisition, says Sullivan.

In response to an analyst's question Tuesday about partners' reaction to the news, Meisel said, "We simply haven't run into any concerns."

Overture, which earlier this month forecast 2003 full-year earnings per share in the range of 90 cents to $1.05, cut its forecast to a range of 60 cents to 70 cents. The acquisitions should be accretive to earnings by mid-2004, says Overture, and should, at a minimum, be neutral to earnings for full-year 2004.

Ethan McAfee, an analyst at Capital Crossover Partners, said that following Tuesday's drop, Overture's stock "is looking much more attractive." McAfee said he had no current holdings in Overture, though he has invested in the company in the past. "Five years from now, the search market will be five times what it is today," McAfee said. "The current valuation probably doesn't reflect that adequately."

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