March 26, 2004 2:10 PM PST

Stoked on search deals

The Internet search business is firing on all cylinders, with two more deals on Friday driving the already hot sector to new heights.

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What's new:
Stocks in Net search companies are hitting new heights in response to Yahoo's $575 million buy of European e-commerce provider Kelkoo and InfoSpace's $160 million bid for Switchboard.

Bottom line:
The health of the market for paid search listings seems to justify the climbing stock prices to some extent. Still, others warn of another mania-driven bubble.

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Yahoo's $575 million acquisition of European e-commerce provider Kelkoo is the Web portal's fourth major acquisition in the past year and a half--the latest effort to expand its search business. Kelkoo provides comparison-shopping services, an arena that's become increasingly important to search companies as they seek to develop commerce applications.

On the same day, InfoSpace targeted another fast-growing search niche in its $160 million bid for Switchboard, a provider of online yellow pages listings. The deal is expected to help the company expand local search listings, an area Yahoo and Google have also been working on.

The buying spree has pushed the stocks of Internet search companies to dizzying heights, including those of little-known players such as Mamma.com, whose shares jumped from about $2 in early March to more than $10. The company is backed by dot-com bubble investor extraordinaire Mark Cuban, who sold his Broadcast.com start-up to Yahoo in 1999 for stock worth more than $5 billion, and cashed out near the top.

Others benefiting from unbridled investor interest in search properties include Ask Jeeves, which was trading near its 52-week high of $34.20 a share late Friday, from a 52-week low of $6.70. Earlier this month, the company announced a deal to buy Interactive Search Holdings for about $343 million in cash and stock.

Shares in InfoSpace jumped nearly 15 percent after its deal was announced Friday, up $4.70 to $36.45. Yahoo shares were up just 19 cents, or 0.4 percent, to $47.13.

The Internet search frenzy isn't limited to Wall Street. The current issue of Newsweek features a cover story on Google--despite such newsworthy events as the war in Iraq, more bloodshed in Palestine and Israel, and the U.S. presidential elections.

Not exactly household names, Google co-founders Sergey Brin and Larry Page grace the pages of the giant newsweekly under the banner "The New Age of Google."

This kind of attention caps a run-up that has been under way for the better part of two years, leading some analysts to renew warnings of a potential stock bubble in the making. "There are some companies whose recent stock appreciation I just can't rationalize," said Schwab Soundview Capital Markets analyst Jordan Rohan. "It seems like a generalization that all search stock should go up."

Analysts said the market fever has been driven in part by the early success of paid search services pioneered by Yahoo's Overture Services subsidiary and Google's Adwords service. Sales from keyword searches increased to 31 percent of the total $1.75 billion in online ad revenue in the third quarter of 2003, according to online-advertising trade group the Internet Advertising Bureau.

"There's a lot of hype around (paid search), but there's a lot of legitimate spending by marketers to drive traffic and sales online," said David Schatsky, an analyst with Jupiter Research. "Even though marketers are telling us they're not sure if they're spending correctly on paid search, they see the benefit."

Off-the-rack or do-it-yourself?
Yahoo has been funding much of the current search bonanza, having announced acquisitions worth more than $2.5 billion since it first jumped into the market in December 2002 by buying Inktomi for $235 million.

Yahoo's acquisition run has cemented its position as the Web's biggest buyer of search technology to date, given that its biggest competitors in search--widely seen as Google and Microsoft--have opted to build rather than buy their way to the top of the market.

On Thursday, Microsoft CEO Steve Ballmer said he regretted not spending more on in-house search research and development in the past, but said the company has addressed the oversight and plans to unveil its own search product within the next 12 months.

"Not only do I think Microsoft is capable of building extraordinary search technology, I believe Microsoft is hell-bent on developing that technology in Redmond (Wash.) without a material acquisition," said Rohan. "That is the Microsoft way."

Google has also relied largely on building its own technology, although it has made some small acquisitions. The company in September paid an undisclosed sum for Kaltix, a search start-up promising to bring greater personalization to search queries.

Other Web giants, including Amazon, have hired search experts in-house, suggesting they may hope to spawn their own search technologies, rather than hit the acquisition trail. Amazon last year launched a group called A9.com to develop e-commerce search and later unveiled a new feature dubbed "Search Inside the Book" that lets readers scan through portions of books and read before they buy.

Yahoo has long been known for its strategy of snapping up companies to boost its business--drawing some criticism during the dot-com bubble for outsized stock-funded deals, notably the Broadcast.com buy and its $4.5 billion 1999 acquisition of GeoCities.

But analysts said they believe Yahoo's search acquisition strategy is sound.

"I think they're deploying a strategy of buy the proven concept, buy the popular site in a geography or category," said Frank Gristina, an analyst with Avondale Partners. "If you have the resources, it's certainly a viable growth strategy."

In addition to Kelkoo and Inktomi, Yahoo snapped up Chinese search company 3721 Network Software in November 2003 for an announced $120 million and Overture Services, in a July 2003 deal worth an estimated $1.63 billion at the time.

In buying Overture, Yahoo also picked up two companies acquired by its target: AltaVista, which Overture purchased for $140 million in February 2003, and the Web search technology of Fast Search and Transfer, picked up the same month for $70 million, with an additional $30 million contingent on meeting certain incentives.

Yahoo said its Kelkoo purchase will expand its international business and give advertisers a more effective way to reach prospective buyers.

"Fundamentally, this makes us the worldwide online shopping leader, which is a key part of our global business strategy," John Marcom, senior vice president of Yahoo International, said in an interview. "Kelkoo gives us the ability to expand our presence with shoppers and offers another way for merchants and advertisers to reach exactly the audience they are looking for."

CNET News.com's Matt Hines contributed to this report.

 

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