Overture to Buy FAST Web Search Unit

Paid search leader Overture Services backed up its talk of becoming a leader in all types of search by announcing an agreement on Tuesday to acquire the Web search unit of FAST Search and Transfer in a deal worth up to $100 million.

Overture said it would pay $70 million in cash for FAST, with additional payments of up to $30 million over the next three years based on the Norway-based search company’s performance. The deal is expected to close in April.

Overture will acquire FAST’s commercial search offering, search site AlltheWeb.com, and the PartnerSite paid-placement product. FAST will retain its enterprise search business.

The deal, coming just a week after Overture inked a deal to acquire search engine pioneer AltaVista for $140 million, continues the company’s spending spree. In just a week, Overture has added the search technologies of two leading search engines, while also acquiring significant paid-inclusion offerings.

“We have filled up our plate, and we will be focused on execution going forward,” said Overture CEO Ted Meisel in a conference call. “We have built the company with an eye towards execution.”

The move would seem to give Overture redundant technologies, as both AltaVista and FAST provide algorithmic search and paid inclusion. Overture said it would integrate the search technologies over time. Some industry watchers see the move as a defensive move, since Microsoft was rumored to be interested in buying FAST or AltaVista.

“[Overture] is going to be doing a lot of spin to justify doing all this,” said Danny Sullivan, editor of Search Engine Watch, which is owned by the parent company of this site. “By getting FAST as well, they’re spending money to build up their walls.”

Overture’s move is also unlikely to impress investors, who lopped about 20 percent off the company’s value following its AltaVista acquisition. Overture said the two acquisitions were likely to lower its 2003 earnings by 20 to 21 cents per share.

For the rest of the year, the two acquisitions are expected to bring in $25 to $30 million in revenues. In 2004, Overture anticipates they will contribute $100 to $125 million.

FAST brings to Overture another search site, AlltheWeb.com, which it expects to use as an incubator for new paid placement products, in a plan similar to that laid out for the AltaVista site.

Overture has spent heavily to barge into the editorial search market, potentially investing $240 million to complete its search offering and go toe-to-toe with the likes of Google. The two acquisitions also bring to Overture something Google doesn’t have — a paid-inclusion product, which allows advertisers to pay to have their site pages included in the index that an algorithmic search engine crawls for results.

“This clearly shows they’re gunning for Google,” said Fredrick Marckini, chief executive of search marketing firm iProspect. “FAST has got some remarkable technology.”

While Overture has greatly remade its business over the past week, Meisel said its focus would remain with paid search.

“Our primary business remains pay-for-performance search,” he said. “I don’t think we’ve changed our competitive profile very much at all.

The acquisition will also improve Overture’s international presence, which the company has sought to expand for new opportunities in the search market. FAST’s base in Europe and availability in 50 languages will bring Overture a higher profile there. Already, the two companies share some clients, including Freeserve in the United Kingdom and T-Online in Germany.

The bold moves into commercial search and paid inclusion come as Overture has felt pressure to diversify its business. While it has remained the industry’s clear leader in the face of competition from Google, Overture has found itself over-reliant on its largest partners, Yahoo! and MSN, for its business. Combined, the two partnerships made up two-thirds of Overture’s business in the fourth quarter.

As a result of this leverage, the mega-portals have struck sweetheart deals with Overture. For example, Yahoo! is estimated to receive 70 percent of the revenue generated by the paid listings on its site. Last year, the partnership generated $140 million for Yahoo!, yet Overture saw its so-called traffic-acquisition costs — how much it pays out to partners — increase to 62 percent of revenue by the fourth quarter. The company expects those costs remain at that level this year and begin to decline in 2004.

The search industry has been red-hot in the past year. Yahoo!, which has become profitable largely from its paid search partnership with Overture, signaled its commitment to the search business with its $235 million deal to acquire search engine and paid inclusion provider Inktomi in December 2002.

At its recent analyst day, search took center stage, as Yahoo! executives said the company was committed to expanding its search offerings throughout the site and expand search innovations to its international sites.

Meisel indicated Yahoo! and MSN did not object to Overture’s aggressive moves in expanding its search offerings.

“Ultimately, from the perspective of the largest component of our revenue today, what matters to them and us is how we deliver to them,” Meisel said at a Goldman Sachs investment conference later in the day.

However, Sullivan said MSN, which considered buying AltaVista and FAST, could not be happy with Overture’s apparent defensive move of snatching up both.

“You both need a car, so you both go the car lot and find two cars you like, and then your friend buys both of the cars,” he said. “Suddenly, you’re wondering if he’s your friend.”

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