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The worst seems to have happened at LookSmart, with Microsoft terminating the longstanding relationship that brought in at least 65 per cent of the sponsored search and web directory provider's revenue. LookSmart may now be heading towards a takeover.

LookSmart said that the deal will end January 15, 2004 and, to understate the obvious, "LookSmart's business and financial results will be materially and adversely affected following the end of the MSN relationship."

LookSmart currently provides a directory of web sites to MSN, among other sites. The LookSmart directory combines paid inclusion and paid performance listings - its advertisers pay to be in it, and pay when they receive traffic as a result.

MSN accounted for 65 per cent of LookSmart's $34.6 million of listings revenue in the quarter ended June 30, and 100 per cent of its $3.8 million of content licensing revenue. Microsoft has told the company it will not renew either portion of the deal.

"No one at LookSmart could have worked any harder to renew this agreement and I will say we were surprised by MSN's decision," CEO Jason Kellerman said in a conference call with analysts and investors.

According to LookSmart's quarterly report, filed last month, Microsoft is considering combining directory and algorithmic search results into a single set of search results. Microsoft is currently developing its own in-house search technology.

"Our understanding is Microsoft made this decision to focus on developing a purely algorithmic search solution," Mr Kellerman said.

LookSmart's share price plummeted over 58 per cent in after-hours trading on Monday night, having closed the day at a little over $3 each. Mr Kellerman said it will definitely be looking at cost-cutting to reduce the impact of losing the deal.

The company, which has so far avoided participating in the consolidation of the search market, may now look like a sweeter target for an acquirer looking to expand its paid search business. Microsoft, a rumored suitor, now seems less likely to buy.

Source: Computerwire/Datamonitor

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