SAN FRANCISCO (AP) -- Online search engine leader Google Inc. will surrender more than $300 million of its stock to Yahoo Inc. in a settlement that removes a legal threat hanging over its IPO at the expense of enriching a nettlesome rival.
The agreement announced 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 Sunnyvale-based 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, spokesman David Krane said Monday.
American Technology Research analyst Mark Mahaney described the settlement as "a minor positive for Google because it removes a risk.''
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 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.
Google picked up some support for its targeted IPO price Monday from Standard & Poor's Internet analyst Scott Kessler, who released a research report estimating the company's fair market value at $121 to $127 per share. Kessler, though, emphasized Google faces substantial risks, including intensifying competition from Microsoft Corp. and Yahoo.
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 Inc., which sued Google for patent infringement in 2002. Yahoo inherited the lawsuit suit last year when it bought Overture.
While denying the lawsuit's allegations, Google has described Overture's patent claims as a major risk since the company first filed its IPO plans in April.
Despite the previous disclosures, many investors might not have grasped the significance of the risks until Monday, Tinker said. "This [settlement] raises the issue about what other unwelcome surprises are still bubbling out there and might come to the surface before the IPO.''
Even with Monday's settlement, Google's advertising network remains a prime legal target.
The company faces several lawsuits alleging that it's breaking the law by auctioning of the advertising rights to trademarked names. Last week, attorneys seeking to represent all California consumers filed a lawsuit against Google, Yahoo and other Internet search engines alleging they are encouraging illegal gambling by distributing the ads of unlicensed casinos.
Despite those risks, most analysts remain bullish about Google, although not all agree the company is worth more than $120 per share. The optimism stems largely from the popularity of Google's renowned search engine and the company's rapid growth since its creation nearly six years ago. Google had earned $143 million on revenue of $1.35 billion through the first half of the year.
A successful Google IPO will have the perverse effect of providing Yahoo with more money to challenge Google's search engine leadership.
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 are fierce rivals but 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.
Yahoo's shares fell 32 cents Monday to close at $25.70 on the Nasdaq Stock Market.
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