AOL has completed its acquisition of Bebo, the UK social networking site. AOL agreed to pay for its recent acquisition $850 million in cash. In the last five years the social networking sites, online places where a user can create a profile and build a personal network that connects him or her to other users, have rocketed from a niche activity into a phenomenon that engages tens of millions of internet users.

Bebo has 40 million worldwide users and is considered one of the leading social networks in the UK. In addition, Bebo is ranked number one in Ireland and New Zealand, and number three in the U.S. Its users are heavily engaged and view an average of 78 pages per usage day. Founded in 2005, by husband and wife team Michael and Xochi Birch, Bebo has approximately 100 employees operating in offices in the UK, San Francisco and Austin, TX.

The new acquisition will form the centerpiece of AOL’s newly created People Networks business unit. Bebo’s CEO Joanna Shields will serve as Executive Vice President of AOL and President of People Networks, which combines Bebo, AIM, ICQ and AOL’s other community platforms and reaches about 80 million users worldwide. Shields will report to AOL President and COO Ron Grant.

For AOL, the acquisition means one more step in its was to the transformation in a Web media and marketing company.

One of the first initiatives for People Networks will be to integrate AOL’s other community applications and tools, including IM, chat and mail functionality into Bebo. It will also let users merge AIM and Bebo profiles so they can use common screen names without re-registering. AIM is the leading instant messaging network in the U.S., with more than 30 million users. ICQ has 28 million active users worldwide.

In addition, People Networks will integrate other recent AOL acquisitions, including widget technology company Goowy Media and social search question and answer service Yedda.