December 23, 2002 9:09 AM PST

Yahoo to acquire Inktomi

Yahoo is planning to acquire search engine specialist Inktomi in a deal worth $235 million as it aims to strengthen its search services.

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Yahoo will pay $1.65 for each share of Inktomi, which closed at $1.17 on Friday, the companies said Monday. The total value of the deal includes an adjustment for Inktomi's cash balance and debt balance. The deal is expected to be completed in the first quarter of 2003.

Inktomi recently finalized the sale of its corporate search business to Verity for about $25 million in cash.

The sale of the business unit was supposed to free up Inktomi to focus on its consumer business. Inktomi has faced increased competition from rival search companies, most notably Google. It recently cut 20 percent of its work force.

Yahoo's acquisition bid marks a notable change of fortune for Inktomi. Founded in 1996, it was one of the biggest players in search technology in the heady days of the dot-com era, providing search functions for companies including America Online, Excite@Home, RealNetworks and NBC Internet. It went public in 1998, raising $36 million. But it suffered a major blow when Yahoo dropped it for rival Google in June 2000.

Inktomi currently has deals to supply search services to Web sites including MSN.com and About.com. Yahoo, which maintains its own category-driven directory, recently signed a deal with Google and Overture to display advertising linked to keywords in searches on its Japanese site. In October, Yahoo said it had extended into the long term a deal to carry Google's search listings as a backup for its own search directory, but did not provide a time frame.

Yahoo CEO Terry Semel said in a release that the Inktomi purchase would add "both control and flexibility" to Yahoo's search business, thus increasing the company's "ability to create new and more innovative search offerings for consumers and business."

But the companies did not explicitly say how Inktomi's consumer business would be combined with Yahoo's service, and what impact the deal would have on Yahoo's deals with Google.

In an interview, Yahoo Chief Operating Officer Dan Rosensweig said that Yahoo has "a very good relationship with other providers, and we expect to continue to have a good relationship," but declined to get more specific.

The deal with Inktomi, Rosensweig said, was part of Yahoo's larger plan to strengthen its search offering.


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"Yahoo has always been committed to providing the best experience on the Web. We made it clear on our last conference call that we were committed to buying, building or partnering" to improve search services, he said.

Inktomi lost $41.5 million, or 29 cents per share, in fiscal 2002, on sales of $112.7 million, excluding charges for real estate, asset impairment, restructuring and commerce division activity, among other charges. But Yahoo said it expected the deal to boost its earnings per share within 12 months of closing.

Yahoo didn't indicate what role Inktomi CEO David Peterschmidt or chief scientist Eric Brewer would play at Yahoo, but Rosensweig said they were both "excited" about the deal and "committed to making sure it goes through."

According to documents filed with the Securities and Exchange Commission, Brewer owns around 4.5 million shares of Inktomi, which would be worth $7.4 million under the terms of the deal. Peterschmidt owns 4.3 million shares, which would be worth $7.1 million.

 

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