AOL, the struggling internet portal owned by the media giant Time Warner, said today that it had bought Bebo, the young social networking site with a global audience of 7.1 million people, for $850 million in cash.

The acquisition comes after 5 months of talks between the two companies, and brings to an end months of speculation in which MTV owner Viacom, Google, US television network CBS, and Microsoft were all named as potential buyers of the site.

It also delivers a huge windfall - understood to be just over $700 million - to Bebo's founders, British man Michael Birch, 37 and his Californian wife Xochi, who set the site up 3 years ago and have nurtured its growth.

No further financial details of the transaction were released.

AOL said it would use the acquisition to expand the reach of its network of sites, and deliver a more compelling prospect to advertisers, who were looking for new ways to engage with online audiences - something Bebo had already begun to offer with its various 'sponsored content' initiatives.

Randy Falco, AOL's chief executive, said: "This is a game-changing acquisition. It puts us in a leading position in social media. Bebo will be the cornerstone of our strategy to transform the online experience of our advertisers and consumers."

Asked whether he thought $850 million was too much to pay for a networking site which has a reach of about a sixth the size of Facebook's and less than a tenth of MySpace, Mr Falco said: "If you look at our track record, we've been prudent with our acquisitions. Compare this with Microsoft's investment in Facebook - $240 million for a 1.6 per cent stake - and we think it's an excellent asset at a great price."

Joanna Shields, Bebo's President, said: "This is a landmark day for our employees and our community. The combined assets (of AOL and Bebo) will set the stage for a new social web, which allows brands to engage in meaningful conversation with their audiences in an environment which is personal to them."

Under the terms of the deal, Ms Shields will continue to run the site, and will report directly to Rob Grant, AOL's chief operating officer.

The acquisition represents a significant coup for AOL, which has been struggling to develop a coherent online strategy, and has recently acquired a number of companies which will help it place ads on its own and others' websites.

Adding Bebo to its portfolio would not only increase its reach, AOL said, but also help with the development of new types of advertising formats, for instance by allowing brands to 'sponsor' short format TV shows, which has been popular with Bebo users.

"We are going to supercharge the monetisation of this (Bebo's) audience," Mr Grant said in a conference call.

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