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Overture a better buy than expected?

Yahoo's acquisition of the paid search company may be more lucrative than the Web portal originally led on, according to a Wall Street analyst.

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Yahoo's acquisition of paid search company Overture Services may be more lucrative than the Web portal originally led on, according to a Wall Street analyst.

Overture may contribute an additional 5 cents per share to Yahoo's earnings per share in 2004, according to Safa Rashtchy, an equity analyst at U.S. Bancorp Piper Jaffray. That's up from his previous estimate of 2 cents per share based on Overture's disclosure that it expects 2004 earnings before interest, taxes, depreciation and amortization (EBITDA) to reach $198 million. Wall Street expects the company's EBITDA to reach $140 million.

The disclosure is significant given fears over the potential fallout of partnerships once Overture folds into Yahoo. Analysts are concerned that Yahoo's acquisition will cause Microsoft's MSN portal to drop Overture as its paid search partner, causing a significant dip in Overture's revenue contribution.

However, Rashtchy wrote in a note to investors that Overture's estimates post-MSN may be cautious.

"While these new estimates are clearly more aggressive than our previous line of thinking, we believe these estimates may still prove conservative, as the search market growth rate seems to be accelerating," Rashtchy wrote.

Yahoo announced its intention to acquire Overture for $1.63 billion in July. With the acquisition, the company will assume control over one of its most lucrative partnerships. Overture is a critical part of Yahoo's ongoing profitability, because it contributes about 20 percent of the Web portal's quarterly revenue, according to company filings. Yahoo last quarter reported a profit of $50 million on revenue of $321.4 million, pegging Overture's contribution at about $64 million.

Overture also has a deal with Microsoft's MSN portal and contributes comparable revenues to the Yahoo deal, Microsoft executives have said. Microsoft will continue using Overture for the time being, while it explores longer-term options, executives have said.

Overture holds auctions for search terms; advertisers pay the company every time someone clicks on a term for which they've bid. Because millions of people use Yahoo and MSN for Web searches, Overture's deal with the portals has resulted in hefty profits that continue to grow.

Yahoo's acquisition of Overture will likely ratchet up its competition against Google, which currently powers the portal's algorithmic Web searches. Besides its popular Web search engine, Google has a paid search business called AdWords that has helped partners such as AOL Time Warner's America Online unit and search engine Ask Jeeves.

Yahoo has search engine technology from Inktomi, which it acquired in March, as a hedge against its reliance on Google. Yahoo executives have hinted at the possibility of swapping out Google with its Inktomi-based technology, but it has made no such move.

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