Google Makes Peace, Gives Yahoo! Bigger Piece Of Its Action
- by Ross Fadner , August 9, 2004
"We are pleased to have resolved these issues and with the terms of the agreement," stated Steve Langdon, a Google spokesperson. A similar statement was also issued by Yahoo!
The $2.7 million will go to Yahoo! subsidiary Overture as payment for licensing its proprietary search technology. Commercial search provider Overture holds property rights to pay-per-click and placement ranking technologies that Google also deploys across its vast ad network.
The agreement ends a two-year court battle with Yahoo! that could have otherwise affected the company's advertising revenue. Google expects the settlement to result in a charge of between $260 million and $290 million, leading to a net loss for the quarter ending Sept. 30.
According to GartnerG2 Analyst Denise Garcia, this could mean "[Google] felt it couldn't win the case and 2.7 million shares is a small price to pay"--or it could mean the lawsuit was more about the processes by which Google generates paid search listings than the actual technology, and Google decided to avoid a lengthy court battle that could elevate risk for its pending offering. She said that a lot of technology companies try to patent their technology, and many times end up trying to patent their processes, which cannot be patented. Garcia noted that Google grew its own technology in-house.
The settlement also ended a dispute between the search giants over Yahoo!'s right to buy shares in Google. Following the agreement, Yahoo! dropped its suit against Google, issuing a "fully paid, perpetual license" to the company, covering each of the 67 claims of Overture's patent. Under an agreement struck in 2000, Yahoo already owned 5.5 million shares of Class B stock.
Investors may be wondering how they should feel, as the settlement with Yahoo! has forced Google to up the number of shares for its offering to 25.7 million from 24.6 million. Diluting the number of shares just prior to the long-awaited IPO could be one more reason for investors and potential investors to feel shaky about Google.
The Mountain View, CA-company has hit a rough road of late in the lead up to its IPO, resulting in a barrage of criticism from the press. In a filing with the SEC last week, Google disclosed that it may have illegally issued more than 23 million shares of its stock to hundreds of employees and consultants.
Also, the company's decision to offer its shares in a Dutch-style offering--once thought to be unique and small-investor-friendly--received equal criticism from financial analysts following the announcement that its shares would sell for the expensive price of between $108 and $135 per share. This has also been a volatile summer on the technology-heavy Nasdaq. Tech stocks have suffered of late due to generally lower-than-expected second-quarter earnings.
As Richard Russell, editor in chief of Dow Theory Letters, writes: "[Google] waited too long. They may know all about the Internet, but they don't know markets!"
As recently as February of this year, Yahoo!'s search engine was powered by Google's technology, subsequently helping it become the Internet's number one search destination. After witnessing the potential of paid search advertising through its partnership with Google, Yahoo! brushed the search provider aside to implement a new engine powered by Overture Services, the company's July 2003 acquisition.
According to the latest filing, Yahoo intends to sell a combination of Class A and B shares totaling 1.6 million shares at the time of the Google's initial public offering.
Google, based in Mountain View, Calif., filed to go public in April with underwriters Morgan Stanley and Credit Suisse First Boston. Google will claim 14.1 million shares of its IPO.
