Google, Yahoo Settle Search Patent Dispute

Google agreed to pay Yahoo up to $365 million worth of shares in a settlement that resolves a lawsuit alleging Google's keyword advertising system violates patents owned by Yahoo subsidiary Overture Services.

The settlement, disclosed in a filing Google made with the Securities and Exchange Commission yesterday, covers two disputes between the companies. Overture sued Google in April 2002, alleging infringement on the patent it held for its system of matching advertisers with search terms. The second dispute arose from the number of Google shares Yahoo was allotted under a services agreement dating to June 2000.

The deal calls for Google to issue Yahoo 2.7 million shares in return for a perpetual license to the Overture technology and for the parties to resolve the services-agreement shares dispute. In return, Overture dismissed its patent suit and Yahoo agreed not to bring future claims related to the services agreement.

Google expects its shares will be worth $108 to $135 each, placing the settlement total between $292 million and $365 million. As a result, Google will take a non-cash charge in the third quarter of $260 million to $290 million, wiping out all profits in the quarter.

Yahoo already owned 5.5 million shares from its early investment in Google. It originally planned to sell 500,000 of them in the IPO. Under the settlement, it will offer 1.6 million. This will increase the number of shares available in Google's stock offering to 25.7 million, and will net Yahoo $173 million to $216 million, based on Google's estimated value of its shares.

After the IPO, Yahoo will own 6.6 million shares, or 2.4 percent of Google's total outstanding shares.

The resolution of the patent dispute removes a lurking danger to Google. Yahoo owns numerous search-related patents, including the 58 Overture acquired through its purchase of AltaVista in February 2003. The settlement gives Google licenses to several of Overture's paid-search patents. In its IPO filing, Google had listed the Overture patent dispute as a business risk it faced if it were forced to alter its AdWords paid listings program.

Yahoo still has patent litigation outstanding against another paid search company, That lawsuit is to go to trial in U.S. District Court in Los Angeles in April 2005.

Though similar, Overture and Google offer different systems for matching advertisers with search terms. Overture lists advertiser listings by their bids in an auction for keywords. Google also operates a keyword auction, but determines search rank based on the bid price multiplied by a listing's click-through rate.

The date of Google's IPO has not been officially set. The auction will occur in August. Several news outlets last week reported Google would push the offering back to later this month. The delay would give the company time to resolve reported technical glitches in the software that takes share orders from institutional investors for the unusual auction Google is operating to allocate shares.

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