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Google Settles Yahoo Patent Suit in Anticipation of IPO

August 10, 2004|Chris Gaither | Times Staff Writer

SAN FRANCISCO — Google Inc. on Monday settled a patent infringement lawsuit filed by rival Yahoo Inc. over online advertising technology, eliminating a key investor concern before the Internet search company's ballyhooed initial public offering.

But the deal has a downside: Google expects to post a loss in its first quarter as a public company.

"That definitely is going to be eye-opening for some people, thinking you're buying into this fast-growing, highly profitable Internet company, then having a loss pop up their first quarter as a publicly traded company," said Scott Kessler, an Internet analyst with Standard & Poor's. "But I think the savvier investors will take that with a grain of salt."

The settlement and the resulting noncash charge of $260 million to $290 million are the latest hiccups in an IPO that has lost some of its shine recently. Silicon Valley and Wall Street had salivated over Google's debut as a public firm, but procedural delays and an estimated share price of $108 to $135 have soured many on the deal.

The Yahoo lawsuit threatened Google's primary source of income: targeted ads delivered next to search-engine results. Yahoo took up the case last year after it bought Pasadena-based Overture Services Inc., which had filed the suit accusing Google of misappropriating the patented system advertisers use to bid on keywords.

In the settlement, Google, of Mountain View, Calif., agreed to hand over 2.7 million shares of its stock. At the top of Google's estimate, Yahoo's stake would be worth $365 million.

Citing the so-called quiet period before its IPO, Google declined to elaborate on why that amount differed from the size of the charge it expected to take.

"This is absolutely a monkey off Google's back," said Nate Elliott, an associate analyst with Jupiter Research. "Any time the basis for your business model is patented by someone else, it's worrisome."

Nearly 98% of Google's revenue comes from search-related ads. The market for such ads is expected to grow to $5.5 billion in 2009, from $1.9 billion last year, according to a Jupiter Research report released Monday.

Once close partners in chasing those dollars, Google and Yahoo are now bitter rivals -- not an uncommon metamorphosis in Silicon Valley, where technological alliances are routinely forged and broken.

Google's technology delivered search results on Yahoo's websites for years, until Yahoo executives realized they were ceding millions of dollars to Google. So Yahoo spent more than $2 billion to acquire Overture and Inktomi Corp., built its own search engine and, in February, dumped Google.

Monday's settlement gave Google a permanent license to the technology, for which Overture received a patent in 2001. Yahoo dropped its lawsuit, and Google abandoned a countersuit claiming the patent was invalid and unenforceable.

Google's lawyers have tried to anticipate investors' concerns about challenges to AdWords, its advertising program, said James D. Nguyen, an intellectual-property lawyer not involved with the case. With some firms upset over Google's practice of selling generic keywords similar to their names to the highest bidders, Google didn't wait for a lawsuit -- it asked a San Jose judge to declare the practice legal.

The Yahoo settlement "is another part of the legal maneuvering Google has done to shore up the rights to its keyword ads program in anticipation of its IPO," said Nguyen, a partner with Foley & Lardner in Century City.

Google said it expected to take the noncash charge in the third quarter, which would cut $100 million to $115 million from its income taxes. The net result would be a loss for the period ending Sept. 30.

Although Google hasn't set a specific timetable for its IPO, many investors believe it will happen later this month or in early September.

Sunnyvale, Calif.-based Yahoo said it planned to sell 1.6 million of its Google shares on the first day of trading, leaving it with 6.6 million shares. "We'll monitor the performance of the shares," Yahoo spokeswoman Nicki Dugan said. "We are pleased with the settlement."

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