Online search engine leader Google will surrender more than $300-million of its stock to Yahoo in a settlement that removes a legal threat hanging over its IPO at the expense of enriching a nettlesome rival.
The agreement announced on Monday gives Yahoo an additional 2,7-million shares of Google stock in exchange for dropping a patent lawsuit involving a crucial piece of online advertising technology.
The payment also resolves a dispute over how much Yahoo is owed under an old partnership between the two companies.
The settlement is worth about $328-million, based on the midpoint in the $108- to $135-per share range that Google has established for its highly anticipated initial public offering.
”I think most people are going to be surprised by the size of this settlement,” predicted ThinkEquity Partners analyst John Tinker. ”You usually don’t want to be doing this sort of thing a few days before you price an IPO.”
Google is pleased with the terms of the settlement, spokesperson David Krane said on Monday.
Accounting for the settlement will saddle Google with a loss for the current quarter ending in September. The Mountain View-based company warned it will absorb a charge of $260-million to $290-million, but didn’t quantify the magnitude of the projected loss.
Google earned $20,4-million during last year’s third quarter.
The projected third-quarter loss represents the latest hiccup in Google’s IPO. The company also has been dealing with a backlash against the high IPO price, confusion about an unusual auction being used to distribute the shares and questions about possible securities violations that occurred with the way it doled out its stock in the past.
Google still expects to complete the IPO later this month, according to documents filed on Monday. The company still hasn’t set a specific date. Google hopes to raise $1,67-billion from the IPO.
Monday’s settlement will result in more IPO shares becoming available. That’s because Yahoo — already a major Google stockholder — plans to sell 1,06-million more shares in the IPO than it intended two weeks ago.
The increase means a total of 25,7-million shares will be available in the IPO — a pool that will raise $3,1-billion, including the amount that will go into the
company’s bank account. Another $1,4-billion will go to insiders offering insiders and other shareholders selling a total of 11,6-million shares.
By settling with Yahoo, Google ensures it will be able to continue to use an advertising system that represents the company’s financial backbone.
Google makes most of its money by auctioning off the right to have text-based ads placed next to specific search words. The concept was pioneered by Overture Services, which sued Google for patent infringement in 2002. Yahoo took over the suit last year when it bought Overture.
A successful Google IPO will have the perverse effect of providing Sunnyvale-based Yahoo with more money to challenge Google’s search engine leadership — a highly profitable position.
Even before Monday’s settlement, Yahoo owned 5,5-million shares of Google stock — a stake acquired through a $10-million investment made in June 2000 when Google was little more than a goofy startup.
Four years later, Yahoo and Google have become fierce rivals that continue to share a financial kinship through Google’s stock.
Bolstered by Monday’s settlement, Yahoo has decided to sell 1,61-million shares of its Google stock in the IPO That means Yahoo figures to raise at least $150-million from Google’s IPO. Yahoo will still own 6,6-million shares after the IPO. ‒ Sapa-AP