Update: Late Friday, Google announced that it closed the On2 Technologies acquisition, valued at about $124.6 million, after On2's shareholders voted to approve the transaction.

"We're excited to welcome the On2 team to Google and to continue to enhance the video experience for users on the web," said Sundar Pichai, Vice President of Product Management at Google. "Through rapid innovation in browsers and web standards, the Internet is becoming the leading platform for development. We believe On2's engineering talent and technology will be an incredible asset for us as we work to improve this platform."

Original Article: Google has announced that it is acquiring video compression technology developer On2 in a deal valued at about $106.5 million. Specifically, each outstanding share of On2 common stock will be converted into $0.60 worth of Google class A common stock in a stock-for-stock transaction.

"Today video is an essential part of the web experience, and we believe high-quality video compression technology should be a part of the web platform," says Sundar Pichai, Vice President, Product Management, Google. "We are committed to innovation in video quality on the web, and we believe that On2’s team and technology will help us further that goal."

"We’re thrilled that On2 is joining one of the world’s most innovative companies," says Matt Frost, interim CEO of On2. "After intensive review of On2 products, Google confirmed our long-held beliefs as to the quality of our video technologies. This transaction is a testament to the hard work of every On2 employee and the strongest possible endorsement of our products and people. On2 will continue to improve, support and sell our products throughout the transition. We believe that Google shares our ambitions and know that our products and expertise, combined with Google’s globally recognized brand, ingenuity and resources, will create an incredible team."

The deal is subject to On2 stockholder approval, as well as regulatory clearances and closing conditions. It's expected to be complete in the fourth quarter of this year.

Google says it's not at liberty to discuss the specifics of plans that will stem from this deal, one might speculate that it has something to do with YouTube, the world's most popular video site, which Google owns, and has just introduced an AdSense-style program, which will surely rake in some money.