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SAN FRANCISCO: Web search leader Google Inc has agreed to acquire top video entertainment site You Tube for $US1.65 billion (NZ$2.5b) in stock, putting a lofty new value on consumer-generated media sites.

The deal, the first to value one of the new crop of user-participation websites at more than $US1 billion, combines two of the most popular internet brands: Google, synonymous with web search and rapid innovation, and You Tube, a Silicon Valley upstart that has spearheaded the video-sharing craze.

In anticipation of the acquisition, investors pushed shares of Google up $US8.50, or 2 per cent, on the Nasdaq on Monday to a closing price of $US429.00 – a level not seen since late April. In extended-hours trade following the announcement of the deal, Google stock dipped to $US427.63.

The stock had already gained about 2 per cent on Friday when reports emerged that a Google-You Tube deal might be in the works. In the last two trading days, Google has added nearly $US4 billion in market capitalisation, or more than twice what the company has agreed to pay for You Tube.

For Google, the acquisition of You Tube would thrust the web search leader quickly into the emerging market for video advertising, where it has only a tiny foothold compared with Yahoo and various web start-ups, analysts said.

“You Tube is phenomenally valuable in terms of traffic and in the internet sector this is important just like location is important in real estate,” said Sasa Zorovic, an analyst at Oppenheimer.

“You Tube has almost 50 per cent of the online video market and combined with Google Video, they’ll have close to 60 per cent of traffic,” Zorovic said, adding the $US1.65 billion price tag was in line with valuations for internet businesses.

You Tube 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.

You Tube has been the subject of acquisition speculation for much of this year. Potential buyers included internet rivals of Google such as Yahoo, as well as media companies like News Corp, owner of, and MTV owner Viacom.

“This is a very good move for Google, strategically, as it opens up to them the possibility to grow in one internet area where they were not very big – that is video,” said Steve Neimeth, portfolio manager for AIG SunAmerica Asset Management.

“Financially, since Google is sitting on top of $US10 billion in cash, and the price came within the range of expectations, it is probably going to be a non-event.”

You Tube says it serves about 100 million videos daily and has drawn scrutiny from major media companies for copyrighted material appearing on its pages without their consent.

In a move that appears to pre-empt the threat of legal action against You Tube, Universal Music Group and Sony BMG said earlier on Monday they signed distribution deals with You Tube, following a similar agreement with Warner Music Group last month.