Google Is On2 Something

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Big G is watching its pennies these days. It's also watching its penny stocks.

Digging deep into speculative equities this morning, Google (Nasdaq: GOOG  ) bought video-compression specialist On2 Technologies (AMEX: ONT  ) for $0.60 a share worth of Google stock.

That's not a misprint, but it is a healthy premium for On2, which closed last night at $0.383 a share.

Google values the deal at a mere $106.5 million, though that price will fluctuate alongside Google's gyrations, given the all-stock nature of the acquisition.

On2's share price is small, but its client list is thick: Adobe (Nasdaq: ADBE  ) , eBay's (Nasdaq: EBAY  ) Skype, Sony (NYSE: SNE  ) , and Nokia (NYSE: NOK  ) are some of the companies it does business with.

Critics of Google's $1.65 billion purchase of YouTube will suggest that the search giant is throwing good money after bad. Snapping up a video-technology company -- even if it's chump change by Google's standards -- only digs it deeper into the eventual need to monetize chunky video streams.

Well, YouTube is making inroads there. It continues to widen its revenue-sharing partnership program. It's also cooking up new ways to deliver targeted ads. YouTube remains the Web's hottest video-sharing site by far, so clearly the company is finding ways to sell sponsored spots without alienating the Aeron potatoes.

This is a small deal, but Google wouldn't have bothered if it could have built a better mousetrap on its own. It also could have been a tactful purchase, in that Google has made sure to keep On2 out of the hands of a digital video rival.

On2 will be put to good use alongside the growing collection of YouTube servers. The small company specialized in advanced video compression, encoding, and publishing. Its "big video, small files" will serve YouTube well, regardless of which way bandwidth costs are headed.

Then again, this could be the future of Google. Bunt-single acquisitions are unlikely to draw regulator scrutiny, so don't be surprised if future buys are small-fry deals like this.

Hey, Google! Can I interest you in a free Penny Pal newsletter?  

Other ways to get off of my cloud:

Google is a Motley Fool Rule Breakers selection. eBay is a Motley Fool Stock Advisor pick. eBay and Nokia are Motley Fool Inside Value selections. Try any of our Foolish newsletter services free for 30 days. These are the real deals, not the Penny Pal prank from 2003.

Longtime Fool contributor Rick Munarriz isn't calling for a search-engine search party, but he may as well. He owns no shares in any of the stocks in this story and is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.

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