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Google Grabs YouTube

A move into online video costs $1.65 billion.

Updated from 4:25 p.m. EDT

Finishing off one of the tech sector's worst-kept secrets,

Google

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announced an agreement to acquire online media phenom

YouTube

for $1.65 billion in a stock-for-stock transaction.

The companies announced after the bell Monday that the acquisition would combine one of the largest and fastest-growing online-video entertainment communities with Google's expertise in organizing information and creating new models for advertising on the Internet.

"The YouTube team has built an exciting and powerful media platform that complements Google's mission to organize the world's information and make it universally accessible and useful," said Eric Schmidt, Google's CEO. "Our companies share similar values; we both always put our users first and are committed to innovating to improve their experience. Together, we are natural partners to offer a compelling media entertainment service to users, content owners and advertisers."

The number of Google shares to be issued in the transaction will be determined based on the 30-day average closing price two trading days prior to the completion of the acquisition. Both companies have approved the transaction, which is subject to customary closing conditions and is expected to close in the fourth quarter of 2006.

YouTube will continue to be based in San Bruno, Calif., and all YouTube employees will remain with the company. The site will also continue to exist as a separate brand with its current name, rather than being folded into Google.

Meanwhile, Google will not pull the plug on its existing Google Video service. In a conference call with media and analysts following the announcement, Schmidt said Google Video is doing well, but that YouTube has created an impressive new way for people to use and share video online.

"When we looked at the marketplace and saw what was going on there was a clear winner in the social networking side of video," said Schmidt.

So-called social networking sites, in which users generate the content, are the hottest properties on the Web these days. Last year

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paid $580 million to buy MySpace, a site in which users create personalized home pages about themselves.

YouTube is reportedly the most popular online video site on the Web. The site is loaded with everything from personal home videos to clips of television shows and music videos, all posted by individual users.

Executives at YouTube and Google stressed the importance of enforcing intellectual property in their vision for online video.

In fact, the acquisition was announced hours after each company

announced separate partnerships with major media companies, easing concerns that YouTube's popular online video service could be at risk of potentially devastating copyright infringement legal claims.

On Monday morning, YouTube said it had struck deals with

Vivendi's

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Universal Music Group, Sony BMG Music Entertainment and

CBS

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, allowing each company's music and videos to be posted on YouTube.

Google announced similar partnerships with Sony BMG and Warner Music Group earlier Monday.

YouTube Chief Technology Officer Steve Chen said the company has been hard at work developing new indexing technology using audio fingerprinting and metadata to allow copyright holders to identify material posted on the site.

Media companies like CBS will be able to use the technology to either yank copyrighted content from the site, or opt to leave it online and stream ads alongside it.

Executives declined to provide many details regarding the deal's structure or how Google arrived at the $1.65 billion price.

Google Senior Vice President of Corporate Development David Drummond said that Google used a "synergistic" model to value YouTube, rather than looking at the company on a strictly stand-alone basis.

"We feel we arrived at a purchase price that's very fair and reflects the great value that has been created at YouTube," said Drummond.

And although most of Google's deals until now have been done in cash, Drummond said the company decided to structure Monday's acquisition as a stock transaction in order to make it tax-free to YouTube shareholders.

The deal caps weeks of speculation over a YouTube buyout. CEO Chad Hurley had previously said the company he co-founded in February 2005 was not for sale.

But Hurley said Monday that the point of those comments was that YouTube wanted to remain independent in order to continue innovating, something he said would still be the case under the Google flag.

"Now we'll be able to sharpen our focus on building new media platforms and combine with Google's experience and resources to accelerate that," said Hurley.

Shares of Google gained $3, or 0.7%, to $432 in extended trading Monday.