Google Buys Postini for $625 Million

Google Inc. is buying e-mail security specialist Postini Inc. for $625 million, fortifying the Internet search leader's effort to sell online software services to corporate customers seeking alternatives to Microsoft Corp.'s long-dominant products.

The all-cash deal announced Monday is aimed at reassuring large businesses that have had qualms about entrusting Google to oversee their e-mail systems and other vital applications because of security concerns.

Google began selling companies a low-cost suite of online software that includes e-mail, calendaring and word processing in February, hoping to diversify its revenue beyond Internet advertising and perhaps siphon money away from Microsoft -- one of its biggest rivals.

Microsoft is trying to challenge Google in the rapidly growing Internet ad market by drawing upon the cash that it has amassed from its market-leading Office suite of software applications and Windows operating system that controls most personal computers.

Google and other Internet companies are threatening Microsoft's stronghold by offering free or low-cost software applications that are hosted online so they don't have to be installed on the hard drives of individual computers.

Although Google says an average of about 1,000 small businesses sign up to use its software applications each day, security worries had become a "road block" to even wider acceptance, said Dave Girouard, the executive in charge of the company's push into the corporate market.

Google believes it will offer potential customers more peace of mind with Postini's added expertise. Formed in 1999, San Carlos-based Postini provides e-mail and instant messaging protection to about 35,000 customers with more than 10 million users. The list of Postini's customers include retailers Circuit City Stores Inc. and Dillard's Inc. as well as natural gas supplier Sempra Energy and Pulte Homes Inc.

Postini and Google formed a partnership in April, paving the way for the negotiations that culminated in the deal announced Monday. Postini executives said the privately held company has been profitable since 2004.

The sale represents a windfall for Postini's early investors, a list that includes Sun Microsystems Inc. and venture capital firms August Capital, Bessemer Venture Partners, Mobius Venture Capital and Summit Partners.

Only a small number of Postini's customers are among the more than 100,000 businesses already using Google's applications, Girouard said, creating a sales opportunity.

Although Postini will continue to be offered on a standalone basis, Google hopes to persuade Postini's customers to "test drive" the Google applications, Girouard said.

"This is a clear statement that we are very committed to this business," Girouard said.

It's unclear how many businesses are anteing up the $50-per-user annual fee that Google charges for the premium version of its online applications because management doesn't disclose the number. The company also offers a more basic version that is subsidized by ads instead of subscriptions.

Software licensing accounted for $36.5 million, or less than 1 percent, of Google's $3.66 billion in revenue during the first three months of this year.

Backed with nearly $12 billion in cash and a high-flying stock, Google has been on a bit of an acquisition spree during the past nine months as management tries to build upon the company's already considerable clout.

Postini represents Google's third largest purchase, ranking behind the company's $1.76 billion acquisition of online video pioneer YouTube late last year and an April agreement to buy online advertising service DoubleClick Inc. for $3.1 billion. The company also agreed in June to pay an undisclosed amount for FeedBurner Inc., a major channel for distributing information from blogs and podcasts.

The DoubleClick deal still must be approved by federal antitrust regulators who are examining whether Google's ownership would hinder competition in the rapidly growing Internet ad market.

The Postini acquisition isn't expected to face the same level of regulatory scrutiny. Google anticipates closing the deal before October.

Google shares rose to a new high of $548.74 Monday before falling back to end at $542.56, up $3.16.

Monday's stock gains appeared to have more do with optimism about Google's opportunity to expand upon its leadership in online advertising rather than enthusiasm about the Postini deal. Google's positioning prompted ThinkEquity Partners analyst Stewart Barry to raise his 12-month projection for the company's stock price to $700, up from $625 previously.