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By MICHAEL LIEDTKE, AP Business Writer

SAN FRANCISCO – Yahoo! Inc (NasdaqNM: YHOO -news ). on Monday snapped up Overture Services Inc. (NasdaqNM: OVER -news ), the pioneer of pay-for-placement online search results, in a $1.6 billion deal that fortifies the Internet powerhouse for a looming showdown with Google and Microsoft.

The cash-and-stock acquisition valued Overture at $24.82 per share — a 15 percent premium over the stock’s closing price last week. The price consists of $312 million in cash and 0.6108 Yahoo shares for each of Overture’s 65.7 million outstanding shares.

The deal’s value will fluctuate with Yahoo’s stock until its expected closing date in the fourth quarter.

Overture’s shares rose $2.54 to close at $24.05 Monday on the Nasdaq Stock Market, where Yahoo’s shares gained 1 cent to close at $32.20.

The acquisition continues a recent flurry of dealmaking in the lucrative business of online searching, a crucial axis on which much of the Internet’s utility depends.

By buying Pasadena, Calif.-based Overture, Yahoo gains control of one of its most important business partners and strikes a blow against Google and Microsoft.

A fierce rival of Google, which offers ad-based results distinct from its popularity-based search rankings, Overture now threatens to become more formidable by tapping into Yahoo’s greater resources, which included $1.1 billion in cash as of June 30.

Privately held Google, which provides some search results to Yahoo, declined to comment on Monday’s deal. Microsoft, whose MSN service, like Yahoo, has been collecting steady profits from Overture, was circumspect.

Lisa Gurry, MSN’s group product manager, said the software giant will make its next move after examining how Yahoo’s deal might affect its relationship with Overture.

Although Yahoo executives said they hope to maintain Overture’s existing alliances with partners such as MSN, it seems improbable that the rivals will want to subsidize each other, said Danny Sullivan, editor of the industry newsletter Search Engine Watch.

“This hurts MSN because Overture had been one of its best buddies,” Sullivan said.

MSN has been pouring more resources into online searching in an effort to become less reliant on services provided by outsiders. Besides relying on Overture for some of its search results, MSN also draws upon Inktomi, a search engine service that Yahoo acquired earlier this year for $279.5 million.

During the past 18 months, Overture has become increasingly valuable to Yahoo, prompting predictions that the two companies eventually would unite.

Overture has played a pivotal role in Yahoo’s recent financial revival, accounting for roughly 20 percent of Yahoo’s revenue of $604 million during the first half of this year.

Conceived by dot-com entrepreneur Bill Gross in 1997, Overture developed a search engine that sorts its results based on how much advertisers are willing to pay to be ranked under specific words.

Overture’s commercial database feeds search engines at popular Web sites such as Yahoo and MSN, which display the advertising links along with results generated by objective, algorithmic formulas.

Ridiculed just a few years ago, the so-called “pay-for-performance” concept has turned into an online gold mine. Pay-for-performance search is expected to generate $2 billion in revenue this year and U.S. Bancorp Piper Jaffray expects the lucrative niche will reach $5 billion in 2006.

Overture has cashed in on pay-for-perfmorance’s popularity, attracting 88,000 advertisers while generating earnings of $114 million since it first became profitable in the summer of 2001.

But the company’s success attracted more competition, most notably from Mountain View, Calif.-based Google, which has lured away pivotal partners such as AOL and EarthLink and spurred pricing concessions that have lowered Overture’s profit margins.

Although it followed in Overture’s footsteps, Google now has a slight edge over its rival in the United States. Domestically, Google’s network generated about 54 percent of all paid search results compared to 45 percent for Overture, according to market research compiled by comScore qSearch.

The competitive pressures prompted Overture’s management to lower its profit projections earlier this year and contributed to a downturn in the company’s stock, opening the door for Yahoo’s offer.

The deal supplements Yahoo’s recent acquisition of Inktomi with two other search engine services, AltaVista and, that Overture bought earlier this year for a total of $207 million.

Putting all those search engine tools under one roof is likely to create overlap, Sullivan said.

Yahoo executives believe all the services will help further its quest to overtake Google as the Web’s most popular search engine.

“We now own all the crucial elements of an end-to-end search offering,” Yahoo CEO Terry Semel said during an analyst call Monday.

Google continues to provide some of Yahoo’s search results. Semel declined to comment how the Overture acquisition will affect Yahoo’s relationship with Google. “I didn’t lay awake last night wondering about that,” Semel said in an interview Monday.

As a counter-punch to Yahoo’s moves, Microsoft seems more likely to acquire a search engine company, Sullivan said.

Potential candidates include Ask Jeeves Inc., Inc. and, perhaps even Google.

MSN’s Gurry declined to comment on the company’s possible interest in Google.

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