Google to give Yahoo 2.7m shares to settle dispute

Google, the internet search engine, yesterday resolved a significant legal dispute that had threatened to weigh on its initial public offering (IPO) as it announced a settlement of the case brought by a division of rival Yahoo.

The company has agreed to hand Yahoo 2.7 million of its shares - equivalent to about 1 per cent of the company and worth about $330 million (€269 million) based on the mid-point of its estimate of what the shares are worth - to bring an end to the case.

Google warned that the settlement was likely to lead to a non-cash charge of $260 million - $290 million and would cause it to report a loss in the three months to the end of September - its first quarter as a public company, provided its flotation is completed as planned.

The settlement also covers a separate dispute in which Yahoo had claimed it was owed extra Google shares as a part of a 2000 service agreement.

The Yahoo legal claim had threatened to strike at the heart of Google's business model by challenging its method of linking advertisements to the results of internet searches.

That form of advertising accounts for the bulk of Google's revenues. It has also become the fastest-growing part of the online advertising business, reaching $2.6 billion overall last year, according to Jupiter Research.

The difficulty for investors of assessing the result of such patent disputes makes them disruptive to IPOs, said Mr Salem Katsh, an intellectual property expert at Shearman and Sterling.

Google hopes to complete the unusual auction of its stock next week, though the process has raised concerns among some underwriters of the offer, who argue that it should be delayed or restructured.

Overture, an online advertising company that was bought by Yahoo last year, had filed the lawsuit against Google in 2002.

The claim covered an Overture patent, dating from 1999, which covered "a continuous, online bidding process" that would let advertisers pay to be included in search results around key words they had selected.

The same idea is the basis for Google's AdWords program.