Autonomy, the UK software company, has agreed to buy its US rival Verity for $500m cash, in a deal that brings together two key players in the corporate search technology market.

Shareholders in Verity, which is listed on the Nasdaq stock exchange, will receive $13.50 per share, a 30 per cent premium on Thursday’s closing price.

The acquisition will be partially funded by a £153m ($272m) rights issue, Cambridge-based Autonomy said on Friday, along with a term loan and some cash reserves. It said the deal would be earnings enhancing “following the integration of the two companies and the end of any market disruption arising in connection” with the acquisition.

On a combined pro-forma basis, the merged company would have made sales of $227m during the past year. Verity’s revenues are larger than Autonomy’s, with sales of $142m for the year to May 31, but its pre-tax profits were lower than the previous year while Autonomy’s pre-tax profits for the nine months to September 30 were more than double the same period last year.

Software vendors such as Autonomy and Verity, which specialise in search and knowledge management tools for enterprises, are facing both new opportunities and stronger competition as the search market heats up, driven by the explosion in marketing through consumer search engines.

Google, one of the world’s biggest technology companies and owner of the most popular search website, in January ramped up its efforts in the enterprise search market with the launch of a low-cost enterprise search device.

Google’s huge popularity and increasingly broad range of products has unnerved companies ranging from telecoms providers to the software giant Microsoft, which this week announced a major internet software initiative to head off its newer rival.

At the same time newer competitors such as Norway’s FAST and US start-up Blinkx, which both make desktop search software. Autonomy has also launched desktop search and Verity had planned to do so.

Mike Lynch, Autonomy chief executive, said the acquisition was “transformational” for his company. “We are bringing together two world-class companies that will substantially increase our scale and diversify our revenue streams.”

Autonomy said Verity’s business search products would “evolve as an integrated component” of Autonomy’s platform, adding that its products were already compatible with Verity’s and the two companies had many customers in common.

The acquisition was expected to be finalised by late 2005. Anthony Bettencourt, Verity chief executive, will be chief executive of Autonomy’s US division.

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