YouTube was close to selling to Yahoo. How Google sealed the $1.65 billion deal at 3 A.M. in a Denny’s parking lot

Google’s $1.65 billion acquisition of YouTube had been finalized in early hours of an October morning in 2006. That was when executives signed the merger documents on the hood of a car in Denny’s parking lot in Redwood City, California.

David Drummond, Google’s general counsel and Gideon Yu, YouTube’s chief financial officer, were using the light from their BlackBerry phones to read the documents, as per a report. That's when a police officer approached them at around 3 am. The officer questioned why they were meeting in the parking lot, Yu explained that they were signing a merger agreement and showed him the paperwork. The officer told them to carry on.

At the time, YouTube was just 18 months old. The firm was struggling to support its rapidly growing audience while facing copyright claims from music labels and movie studios.


As per a June 2020 report by Business Insider, based on interviews with people involved in the acquisition, detailed how YouTube’s founders decided to sell and how Google secured the deal.

YouTube Was Struggling With Server Demands and Copyright Claims

YouTube’s cofounders, Steve Chen and Chad Hurley were struggling to keep up with the platform’s growth. The company was burning through server space as video views increased rapidly.

Yu Pan, YouTube’s first employee and an engineer, recalled that the team was working seven days a week and burning through hard drives. Gideon Yu, who joined as CFO in September 2006, said the company reached out to investors, friends and contacts at other businesses to ask whether they had unused servers it could borrow.

The technical challenges were accompanied by copyright concerns. Music and movie content owned by entertainment companies was appearing on YouTube faster than employees could remove it, raising the risk of litigation.

Roelof Botha, a Sequoia Capital investor who pushed his firm to invest in YouTube said the founders had not intended the platform to become a place for pirated content. He said the legal threats made Chen and Hurley question whether it was worth continuing without more resources.

YouTube’s general counsel and vice president of business affairs, Zahavah Levine, recalled that infrastructure demands were high, the company’s bank account was dwindling and music executives were demanding hundreds of millions of dollars. Other companies were also approaching YouTube about potential partnerships.

YouTube’s Founders Decided to Sell

One afternoon, YouTube had a contentious meeting with Universal Music over copyright violations. Later that day, Chen and Hurley went to the 3rd Avenue Sports Bar next to YouTube’s office in San Mateo.

There, they told Gideon Yu they wanted to sell the company.

Yu recalled that the founders were frustrated by the growing number of meetings about copyright infringement, which were becoming increasingly hostile. They had started YouTube to make a good product, he said, and the copyright disputes were not what they had signed up for.

The group discussed whether selling to a larger company would give YouTube access to the resources needed to negotiate agreements with rights holders and address infrastructure problems. After consulting the company’s board and investors, they agreed to pursue an acquisition.

Google and Yahoo Emerged as the Main Contenders

The acquisition process took about three weeks after the founders decided to sell, Yu said. Microsoft, Viacom and News Corp were among the potential buyers discussed, but Google and Yahoo emerged as the two main contenders.

YouTube’s founders met Google cofounder Larry Page and then-CEO Eric Schmidt at a Denny’s in Redwood City. They met Yahoo executives the following day.

Google soon made an offer, but Yu said the price was too low. Meanwhile, YouTube was negotiating agreements with music companies in an effort to avoid costly copyright lawsuits.

In September 2006, Levine and Chris Maxcy, one of YouTube’s early employees responsible for business development, closed a deal with Warner Music. The agreement allowed YouTube to host user-generated videos containing Warner-owned music in exchange for a share of advertising revenue.

On the day the acquisition was announced, YouTube also announced three separate agreements: one with CBS to broadcast its programs, and two with Universal Music Group and the predecessor to Sony Music, allowing YouTube to air their music videos.

Why Google Agreed to Pay $1.65 Billion

By early October, YouTube was close to signing a deal with Yahoo. A full day of due diligence had been scheduled, with plans to sign a term sheet at the end of the meeting.

The day before, YouTube decided to give Google one last chance to improve its offer. Pierre Lamond, a former Sequoia partner, said YouTube put Yahoo on the back burner while pushing Google for a higher price.

Yu said he received approval from Chen and Hurley to name a price, telling Google that YouTube would cancel its meeting with Yahoo if the company agreed.

YouTube proposed $1.65 billion. Botha said the figure was deliberately set 10% above what eBay paid for PayPal in 2002.

Google accepted the price. With the Yahoo meeting still scheduled for the following morning, the paperwork had to be completed overnight.

The Deal Was Signed at Around 3 A.M.

Drummond and Yu worked through the night to finish the documents. They returned to the Denny’s parking lot and reviewed the papers on the hood of Yu’s car, using their BlackBerry phones for light.

A police officer approached them at around 3 a.m. and questioned what they were doing. Yu explained that they were signing a merger agreement and showed the officer the documents. The officer allowed them to continue.

After signing the papers, Yu showed them to Chen and Hurley, then called Yahoo to cancel the meeting.

Google announced the $1.65 billion stock acquisition on October 9, 2006. The announcement came only days after the term sheet was signed. The acquisition closed in November 2006.

YouTube Initially Continued Operating Separately

After the acquisition, YouTube continued operating from its separate office in San Bruno, California. Google had promised to let the company continue developing its service and creator community while taking a hands-off approach.

The first changes employees noticed were relatively small. Google added mini convenience stores to the office, company parties improved, and employees received a catered Subway lunch the day after the acquisition was announced.

The companies eventually merged the YouTube and Google Video teams. Chen described the transition as awkward at first because the two services had previously competed with each other.

Chen left YouTube for Google in 2009 and moved on from the company two years later. Hurley remained YouTube’s CEO until 2010, when Google’s Salar Kamangar took over. Chen and Hurley partnered in 2011 to launch AVOS Systems.