Shares in Autonomy surged in morning trade after the Cambridge-based search group said it would demerge its consumer-focused arm, in a move that will create an AIM-listed vehicle that will compete head-on with Google.

Autonomy will exercise an option over Blinkx, the video search group and its leading consumer customer, that will initially leave it with a 90 per cent stake. The search group currently holds no stake in Blinkx but was granted an option as part of a licence agreement, under which Blinkx uses Autonomy software to search video content for users.

Blinkx will then be combined with Autonomy's consumer arm and will float on AIM in May, with analysts tipping a market value of anywhere between $150 million and $500 million.

Autonomy's share in Blinkx will reduce to 10 per cent as the company pays shareholders a tax-efficient dividend in the form of Blinkx shares.

Blinkx's core website, Blinkx.com, is the world's largest video search engine. It competes with the likes of Google Video and YouTube, both owned by Google. However, Google's technology requires users to upload their own videos. Blinkx, by contrast, searches the internet and uses Autonomy software to determine the content of videos already uploaded to other sites.

Mike Lynch, Autonomy's founder and chief executive, said it made sense to split the business and should deliver more value for shareholders. The consumer-focused business makes money through advertisements whereas the business-focused division earns money from licences.

Autonomy's software allows businesses to search video and audio data, as well as text, by context. It is used in call centres to automatically interpret callers' problems as they speak with call centre staff.

Blinkx was founded by Suranga Chandratillake, a Cambridge University graduate and former Autonomy employee, in 2004. He founded Blinkx in San Francisco, having moved to the city with Autonomy as its chief technology officer.

Autonomy shares were trading up 59.5p at 758p at 9am.

Times Recommends

• C&G axed - 1,660 jobs to be lost
• UK house prices rise 1.1% as buyers return
• Mixed reaction to US banks repaying bailouts