Google Dealmaking Reeks of Sanity - TheStreet

Google Dealmaking Reeks of Sanity

Two recent acquisitions -- Postini and Grand Central -- make perfect strategic sense.
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Here's a refreshing change from the trend of Internet giantsspending way too much money on companies with questionable strategic value:

Google

(GOOG) - Get Report

has spent $625 million on Postini,whose email-security software has helped keep billions of spam emailsout 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 wordgets out, and right or wrong, the whispered price is $50 million. Thatwould be less than $700 million for two of the most promising start-upsout there right now.

I've been using Grand Central for several months, and I think thatif enough people take to it, it could become huge. You sign up forone phone number for life, and when someone dials it, it rings yourhome, office and/or mobile phones at your will. You can check voicemessages remotely from its Web site. (Sign up soon if you want a phonenumber 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 satisfactionsurveys.

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 somemalware attached to them.

Postini's revenue has doubled in recent years, and it's beenprofitable since 2004, which is when Google started the first of itsfree online applications -- Gmail -- that would go on to compete with theOffice suite of applications that

Microsoft

(MSFT) - Get Report

has long bundled in itsoperating 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 anywherethere's an Internet connection -- and, more recently, offline access tosome programs as well.

Small businesses and universities have taken to Google "apps," but bigcompanies 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 faraway from the user's computer -- called on-demand software, or if youprefer, software-as-a-service -- is that it's supposed to simplify thingsfor the user by reducing maintenance and operational costs.

The two companies maintain there is little overlap among theircustomers. Postini has 11 million users among 35,000 customers aroundthe world, including meat master

Hormel

(HRL) - Get Report

, diet guru

JennyCraig

, brewer

Sierra Nevada

, electronics retailer

CircuitCity

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, automaker

Mitsubishi Motors

, legal giant

Cooley Godward

, and the United Nations Development Program.

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

Google, meanwhile, not only has access to new customers, but byadding one of the best and most scalable softwares filtering out spam andviruses attached to emails and instant messages, it can soothe a lot ofanxieties among companies that are still gun-shy about moving theiremails, IMs, spreadsheets and word-processing documents to a remoteserver.

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

On the conference call, both Google and Postini stressed that therewas a strong cultural match between the two companies. And therein liesa dark joke: Both are afflicted by brilliant employees under chaoticwork cultures. Yet those cultures haven't managed to slow the growth ofeither company.

The bad news about this acquisition, as well as the Grand Centraldeal, is that the public market has been deprived of two of its morepromising IPO candidates. Postini in particular has been talked about asa prime IPO vehicle since 2004. Its executiveswere 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 lastseveral months undervalued. Postini's reported annual revenue is $75million, 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 withoutthe underwriting fees -- and without the hassles of quarterly earnings apublic company faces. Google gets a boost to its Apps -- its next bigarea of focus after its search engine -- and the Internet M&A market getsa return -- albeit brief -- to sane dealmaking. Not a bad way to start thesummer.