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Google Dealmaking Reeks of Sanity

Kevin Kelleher

Here's a refreshing change from the trend of Internet giants spending way too much money on companies with questionable strategic value: Google has spent $625 million on Postini, whose email-security software has helped keep billions of spam emails out of customers' inboxes.

That news came a week after another shrewd deal on Google's part, its acquisition of Grand Central, the service, powered by voice-over-Internet protocol, that is sort of a Lord of the Rings for your telephone: One number to rule them all.

Google didn't disclose the value of the Grand Central deal, but word gets out, and right or wrong, the whispered price is $50 million. That would be less than $700 million for two of the most promising start-ups out there right now.

I've been using Grand Central for several months, and I think that if enough people take to it, it could become huge. You sign up for one phone number for life, and when someone dials it, it rings your home, office and/or mobile phones at your will. You can check voice messages remotely from its Web site. (Sign up soon if you want a phone number that spells something memorable).

Postini is less visible to consumers, but it's already made a mark, both in terms of industry awards and customer satisfaction surveys.

It's emerged as a leader in a market that has a robust future: filtering out emails sent from spammers or, even worse, that have some malware attached to them.

Postini's revenue has doubled in recent years, and it's been profitable since 2004, which is when Google started the first of its free online applications -- Gmail -- that would go on to compete with the Office suite of applications that Microsoft has long bundled in its operating system at a hefty price per user.

That's not quite fair to Google. Its applications have, in some respects, surpassed Microsoft's offerings, allowing access anytime and anywhere there's an Internet connection -- and, more recently, offline access to some programs as well.

Small businesses and universities have taken to Google "apps," but big companies have been reluctant to adopt the programs because integration with legacy systems is tricky, and the demands of legal compliance and information security have proved difficult to overcome.

According to Google's comments on Monday's conference call, this is where Postini comes in.

The whole idea behind hosting software applications on a server far away from the user's computer -- called on-demand software, or if you prefer, software-as-a-service -- is that it's supposed to simplify things for the user by reducing maintenance and operational costs.

The two companies maintain there is little overlap among their customers. Postini has 11 million users among 35,000 customers around the world, including meat master Hormel , diet guru Jenny Craig, brewer Sierra Nevada, electronics retailer Circuit City , automaker Mitsubishi Motors, legal giant Cooley Godward, and the United Nations Development Program.

Beyond that, the benefits of the deal are more significant. With Google Apps, Postini gets instant access to a large number of smaller companies -- Google claims 1,000 a day are signing up -- which are turning to what may emerge as the industry standard over the next few years.

Google, meanwhile, not only has access to new customers, but by adding one of the best and most scalable softwares filtering out spam and viruses attached to emails and instant messages, it can soothe a lot of anxieties among companies that are still gun-shy about moving their emails, IMs, spreadsheets and word-processing documents to a remote server.

In the long run, this deal is a bigger benefit for Google.

On the conference call, both Google and Postini stressed that there was a strong cultural match between the two companies. And therein lies a dark joke: Both are afflicted by brilliant employees under chaotic work cultures. Yet those cultures haven't managed to slow the growth of either company.

The bad news about this acquisition, as well as the Grand Central deal, is that the public market has been deprived of two of its more promising IPO candidates. Postini in particular has been talked about as a prime IPO vehicle since 2004. Its executives were murmuring just last month about filing an S-1.

Google is paying for Postini entirely in cash, which is a little odd, considering that its stock is on an upswing after spending the last several months undervalued. Postini's reported annual revenue is $75 million, so the $625 million Google is paying is eight times that figure -- which is in line with recent IPO valuations.

So, Postini gets the cash it would have gotten from an IPO without the underwriting fees -- and without the hassles of quarterly earnings a public company faces. Google gets a boost to its Apps -- its next big area of focus after its search engine -- and the Internet M&A market gets a return -- albeit brief -- to sane dealmaking. Not a bad way to start the summer.