Yahoo Inc, the owner of the world's most-used Internet sites, said it will buy Overture Services Inc for US$1.63 billion to increase its revenue from Web searching, a fast-growing area where Google Inc has emerged as the leader.
Yahoo, based in Sunnyvale, California, will pay 0.6108 share of its stock and US$4.75 in cash for each Overture share, the companies said in a statement.
That values Overture shares at US$24.41, a 13 percent premium over their closing price last Friday.
Chief executive Terry Semel is increasing his investment in sponsored-search advertising, where businesses can pay to have their Web sites listed at the top of Internet-search results.
The market for sponsored-search ads is expected to grow about 35 percent annually to US$5 billion in 2006 from US$2 billion this year, Yahoo said, citing a forecast by US Bancorp Piper Jaffray.
"Sponsored search is a major growth driver for Yahoo," said Anthony Valencia, an analyst at TCW Group Inc in Los Angeles.
TCW held more than 16 million Yahoo shares in March, according to regulatory filings.
Yahoo expects the acquisition of Overture to be at least break-even next year and add to earnings and cash flow thereafter, chief financial officer Sue Decker said in an interview.
Yahoo already has a partnership with Pasadena, California-based Overture that lets businesses bid against each other to have their Web sites placed at the top of search listings.
By entering "Tour de France" into Yahoo's search engine, for example, the first listing is a sponsored-search ad, provided by Overture, for a page on auction service EBay Inc that offers collectibles relating to the bicycle race.
Sales of sponsored search ads contributed more than half of Yahoo's 42 percent gain in second-quarter revenue, Jeetil Patel, an analyst at Deutsche Bank in San Francisco, wrote in a note to clients last week.
Owning Overture's technology will allow Yahoo more quickly to place sponsored-search listings elsewhere in its group of Web sites, Yahoo said. In addition to selling ads on its search page, Yahoo said it wants to place sponsored search ads in sections devoted to shopping, travel, sports news, and real estate and auto listings.
Yahoo said it will sell other forms of advertising and services, such as Web-site hosting and links to online stores, to Overture's advertising clients. And Yahoo will expand its sponsored search service overseas to regional Web sites targeting users in Europe, South Korea and Japan.
Yahoo's Web sites, which include services such as e-mail and news, as well as its search engine, are the most visited in the world, according to research firm Nielsen/NetRatings. Still, Google's Web site gets more visitors for searches, analysts have said.
In the US, 32 percent of Web searches were done on Google's Web site in May, compared with 25 percent on Yahoo, according to ComScore Networks Inc.
Semel has been trying to improve Yahoo's search engine to win back traffic from Google and others. He bought search-engine maker Inktomi Corp in March to gain its technology and had Yahoo's search page redesigned in April.
Yahoo is also running a national advertising campaign to promote its search engine.
Web sites that compete with Yahoo, including Microsoft Corp's MSN, might now be reluctant to continue buying sponsored-search advertising from Overture, investors said.