Google and On2 Technologies jointly announced today that they have entered into a definitive agreement under which Google will acquire On2, a developer of video compression technology. The acquisition is expected to close later this year. On2 markets video compression technologies that power high-quality video in both desktop and mobile applications and devices and also holds a number of interesting patents.

Some of its codec designs are known as VP3, VP4, VP5, TrueMotion VP6, TrueMotion VP7 and VP8. Its customers include Adobe, Skype, Nokia, Infineon, Sun Microsystems, Mediatek, Sony, Brightcove, and Move Networks. On2, formerly known as The Duck Corporation, is headquartered in Clifton Park, NY.

Under the terms of the agreement, 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. The transaction is valued at approximately $106.5 million.

According to the release, $0.60 per share represents a premium of approximately 57% over the closing price of On2’s common stock on the last trading day immediately prior to the announcement of the transaction, and a premium of approximately 62% over the average closing price of On2’s common stock for the six month period immediately prior to the announcement of the transaction.

Important to note is that On2 once had a market cap in excess of $1 billion at its peak, after going public on the American Stock Exchange in 1999 following a merger with Applied Capital Funding (which was already listed at the time). Before its entry on the public market, The Duck Corporation had raised $6.5M in venture capital funding from Edelson Technology Partners and Citigroup Ventures.

Back in 2001, On2 made waves by releasing their VP3 compression technology to the open-source community, including their patents on the technology. The technology lives on in the form of (Ogg) Theora. You can find more information about this here.

The agreement is subject to On2 stockholder approval, regulatory clearances and other closing conditions.

Google is reluctant to dive into specific regarding the product plans until after the deal closes, although it’s conceivably related to its immensely popular video service YouTube.

In a blog post, the company says:

“Although we’re not in a position to discuss specific product plans until after the deal closes, we are committed to innovation in video quality on the web, and we believe that On2 Technologies’ team and technology will help us further that goal.

We’ll update everybody when we’re able to share more information. In the meantime, nothing will change for On2 Technologies’ current and prospective customers.”

If would be great if Google decides to open-source On2’s VP7 and VP8 video codecs and free them up as the worldwide video codec standards, thus becoming alternatives to the proprietary and licenced H264 codecs. On2 has always claimed VP7 is better quality than H264 at the same bitrate.

Also noteworthy: Google could use the VP8 codec for YouTube in HTML5 mode, basically forcing its many users to upgrade to HTML5-compliant browsers instead of using Flash formats.

Smart move by Google, and possibly great news for innovation in web-based video viewing.

Expect updates if and when we learn more.