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USAI is paying a 20 percent premium for the shares. In early trading following the news, Hotels.com (ROOM: news, chart, profile) ran up $10.90, or 21 percent, to $64.20 while USAI (USAI: news, chart, profile) gained 7 percent to $26.90.

Under the agreement, Hotels.com shareholders will receive 2.4 shares of USAI common stock for each share of their Hotels.com stock.

USAI will issue about 45.2 million shares to Hotels.com shareholders. The Hotels.com transaction is expected to add slightly to USAI's earnings this year, the companies said.

The deal comes three weeks after USA Interactive purchased the remaining shares of online travel giant Expedia (EXPE: news, chart, profile) that it didn't already own. Expedia rose 4 percent to $51.75.

Meanwhile, Yahoo (YHOO: news, chart, profile) shares rose 5 percent to $24.10, after the company posted first-quarter results that topped expectations, and its outlook for the year. See full story.

Two analysts, one from First Albany and the other from Thomas Weisel Partners, raised their ratings on Yahoo shares.

But most analysts maintained their ratings on the stock due to valuation concerns. The stock had largely baked in a good quarter and upward projections for 2003. In fact, the stock is assuming aggressive expectations out to 2005. Yahoo shares started below $20 at the start of March, and struck an intra-day 52-week high of $25.25 on Monday and a closing 52-week high of $24.05 last Friday.

Yahoo's marketing services division, which includes traditional advertising, sponsored-search advertising and shopping, generated $190 million in sales. This was driven largely by the paid-search business that Yahoo enjoys primarily through its relationship with Overture (OVER: news, chart, profile). Yahoo does not break out this number, but analysts estimate that Overture's contribution was roughly $59 million to $61 million, or 34 percent of Yahoo's marketing business.

Traditional advertising grew at a slower 13 to 14 percent year-over-year rate. While it is impressive in the sluggish economic environment, analysts say that in order for Yahoo to grow revenue by 25 percent beyond 2003, traditional advertising sales must accelerate. Goldman Sachs analyst Anthony Noto calculates that Yahoo will need to grow traditional advertising in the high teens next year in order to support 25 percent revenue growth.

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