Web search leader Google Inc said on Monday it agreed to acquire top video entertainment site YouTube Inc for $1.65 billion in stock, the highest price yet paid for a consumer-generated media site.
The first deal to value one of the new generation of user-participation Web sites at more than $1 billion combines two of the most popular Internet brands: Google, synonymous with Web search and rapid innovation, and YouTube, a Silicon Valley upstart that has spearheaded the video-sharing craze.
YouTube, which grew in 19 months from a start-up in a garage to now serve up 100 million videos daily, has drawn scrutiny from major media companies for copyrighted television and music videos that users post without owner consent.
While YouTube said on Monday it had signed a spate of distribution agreements with major record labels, some analysts caution Google could still be inviting lawsuits with this acquisition.
Nonetheless, in anticipation of the deal, investors pushed shares of Google up $8.50, or 2 percent, on Nasdaq on Monday to a closing price of $429.00 - a level not seen since late April. In extended hours trade, Google climbed to $431.55.
"YouTube is phenomenally valuable in terms of traffic and in the Internet sector this is important just like location is important in real estate," Oppenheimer analyst Sasa Zorovic said of combining YouTube with Google's advertising machinery.
Analysts said the deal would thrust Google quickly into the emerging market for video advertising, where it has only a tiny foothold compared with Yahoo Inc and start-ups.
The all-stock deal, expected to close this quarter, was structured to make it tax-free for YouTube shareholders and cheaper for Google than paying cash, company officials said. The move is a big departure for Google, Citigroup analyst Mark Mahaney noted, with the purchase price almost equal to the total value of what the company has spent on prior mergers.
But the value of combining one of the world's largest user generated sites with one of world's largest advertising and computer networks "could be enormous," Mahaney predicted.
Google's stock had already gained about 2 percent on Friday when reports emerged that a deal might be in the works. In two trading days, Google has added around $6 billion in market capitalisation, or more than three times what the company has agreed to pay for YouTube.
YouTube was founded in February 2005 as one of dozens of Internet video start-ups. It has exploded in popularity since last November by letting users share short clips of home videos and programming copied from television. YouTube ranks behind only a handful of other so-called Web 2.0 sites - the new generation of Web sites that rely on user-generated publishing for much of their content.