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Google does IPO its own way

By Michael Liedtke
The Associated Press

BEN MARGOT / AP Google co-founders Larry Page, left, and Sergey Brin are seen at their company's headquarters in January in Mountain View, Calif.

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Without specifying a price per share, Google said it hopes to raise $2.7 billion with an initial public offering that has created the biggest high-tech buzz since the dot-com bubble burst four years ago.

Google also set off a contest as to which exchange will list its stock — the prestigious New York Stock Exchange or the electronic Nasdaq Stock Market, home of technology leaders Microsoft and Amazon.com. The company said it could be either one.

	Eric Schmidt

The IPO is expected to give Google a market value of at least $20 billion, creating scores of new Silicon Valley millionaires — including many of the company's 1,900 employees.

"Feels great!" Google employee Edwina Beaus said as she walked between buildings at the company's Mountain View headquarters — a hub known as the "Googleplex."

But even as it prepared to dance with the Wall Street bankers who will take it public, Google warned investors that it won't take its marching orders from the markets.

Google at a glance • Incorporation: Sept. 7, 1998 • Founders: Sergey Brin, now 30, and Larry Page, 31 • Chairman and CEO: Eric Schmidt, former Novell CEO • Headquarters: Mountain View, Calif. • Employees: 1,907 • Market: New York Stock Exchange or Nasdaq • Symbol: undisclosed • Competitors: Yahoo!, Microsoft MSN portal, Ask Jeeves • Search index: more than 4 billion Web pages • 2003 sales: $961.9 million vs. $347.8 million in 2002 • 2003 net profit: $105.6 million vs. $99.7 million in 2002 • 2004 first-quarter sales: $389.6 million vs. $178.9 million a year earlier • 2004 first-quarter profit: $64.0 million vs. $25.8 million a year earlier • Shares outstanding: 246.1 million total shares, including 11.9 million Class A shares and 234.2 million Class B shares. Class B shares have 10 times the voting power of the Class A shares, which will be sold to the public. • Shareholders: Venture-capital firms Kleiner Perkins Caufield & Byers and Sequoia Capital own nearly 10 percent each of total shares of the company. Founder Brin owns 15.6 percent. Page has 15.7 percent. All own super-voting Class B shares. Yahoo! also holds a stake, along with funds whose investors include celebrities such as Tiger Woods, Shaquille O'Neal, Henry Kissinger and Arnold Schwarzenegger. • Board of directors: Arthur Levinson, chairman and chief executive of Genentech; Paul Otellini, Intel president and COO; John Hennessy, Stanford University president; John Doerr, partner with venture-capital firm Kleiner Perkins Caufield & Byers (also a director at Amazon.com and drugstore.com); Michael Mortiz, venture partner with Sequoia Capital; K. Ram Shriram, angel investor and former CEO of database-technology firm Junglee, which was sold to Amazon in 1998.

"Google is not a conventional company. We do not intend to become one," co-founders Larry Page and Sergey Brin wrote in an open letter included in the IPO filing.

As expected, Google said the price of its IPO will be determined through an auction designed to give the general public a better chance to buy its stock before the shares begin trading, most likely in late summer or early autumn. IPO shares traditionally have been restricted to an elite group picked by the investment bankers handling the deal.

Google picked two long-established investment bankers — Morgan Stanley and Credit Suisse First Boston — to manage its populist IPO approach.

The banks may get less than $100 million for the sale, based on commissions in similar-sized deals, possibly less than the 4 percent paid in IPOs of similar size.

"It should be less than 4 percent," said Philip Phan, 41, a finance professor at Rensselaer Polytechnic Institute and consultant to the World Bank. "All this is going to be done electronically. It's going to be hard to justify the usual fees."

Investor appetite for Google shares gave the company's owners the upper hand in negotiating terms of the IPO with Morgan Stanley and Credit Suisse, Phan said.

"Because it's the hottest offering in the past 12 months, the banks have to go along," he said. "It shows a shift in power from the banks that used to control the process to the owners."

Google also failed to disclose where the shares will be listed, setting the stage for a battle between the New York Stock Exchange (NYSE) and Nasdaq Stock Market.

Landing Google's IPO would be a coup for either market. The biggest Internet companies, such as Amazon.com and eBay, trade on the Nasdaq. About 30 percent of Nasdaq's 3,300 companies are classified as technology, compared with 6 percent of the 2,049 common stocks listed on the NYSE.

"It always hurts to lose a listing," said James Angel, a Georgetown University associate finance professor and visiting economist at Nasdaq from 1999 to 2000. "The blow to Nasdaq if Google goes to the NYSE would be far worse than the blow to the NYSE if Google goes to Nasdaq."

"Stock exchanges make their money with activity on their exchanges," said William Gorin, a partner at Cleary, Gottlieb, Steen & Hamilton in New York, who has assisted companies with their IPO filings with the SEC. "Since Google is likely to be a very prestigious and actively traded stock, any exchange which gets its shares will be very happy."

Although Google's stock won't be sold for several more months, the filing represents a significant milestone in the 5-1/2-year-old company's evolution from a fun-loving startup to a corporate adolescent that will be held more accountable for how it manages its money.

Doubling its earnings

Google has done well so far, according to a filing that shined a light on the privately held company's finances for the first time.

Depending almost entirely on advertising linked to online searches, Google earned $105.6 million, or 41 cents per share, on revenue of $962 million last year. Google got off to an even better start this year, with a first-quarter profit of $64 million, or 24 cents per share — more than doubling its earnings of $25.8 million, or 10 cents per share, at the same time last year.

By going public, Google will be under greater pressure to produce steady earnings growth — an expectation that some executives say leads to shortsighted management decisions.

As a public company, "you become sharper in some respects, but it also can cause you to make some decisions just so you can show growth from quarter to quarter," said Steve Berkowtiz, chief executive of Ask Jeeves, a Google rival and business partner.

But Google says it won't fall into that trap, striving to remain true to the vision of the iconoclastic Page and Brin, former Stanford University graduate students who founded the company in 1998. In one of its first rebellious steps, Google will refuse to project its earnings from quarter to quarter, according to the letter signed by Page and Brin.

"A management team distracted by a series of short-term targets is as pointless as a dieter stepping on a scale every half hour," they wrote.

Industry veterans, though, doubt Google will be able to buck Wall Street once it goes public.

	PAUL SAKUMA / AP Google employees leave Google headquarters in Mountain View, Calif., yesterday after a company meeting about their IPO. The stock sale will most likely be in late summer or early autumn.

"After the IPO, they're going to have to think in terms of predictable quarterly results and momentum," said Gordon Eubanks, who took software maker Symantec public in 1989 and now is CEO of Oblix, a security startup. "You have to have a level of predictability and experience to warrant being a public company."

Two classes of shares

To insulate themselves from outside pressure, Page and Brin are creating a two-class stock hierarchy designed to give them effective veto power. The company is selling Class A common stock to the public, but Page and Brin will control Class B stock, which will have 10 times the voting power.

The setup is similar to systems used by several major media companies and Berkshire Hathaway, run by stock-market sage Warren Buffett.

Yesterday's filing didn't spell out how large the founders' stakes will be after the offering, although they are listed as the company's largest individual shareholders. Both are expected to become billionaires after the IPO. Google paid each man $356,556 in salary and bonuses last year.

The filing also emphasized that both Page, 31, and Brin, 30, intend to remain Google's hands-on leaders, making all key decisions with CEO Eric Schmidt, a former top executive at Sun Microsystems and Novell, who joined the company in 2001.

Google is already one of the world's best-known brands, with an online search engine that processes more than 200 million queries daily.

Despite its rapid success, Google faces an uncertain future as it tries to fend off stiffening competition from two much larger rivals, software giant Microsoft and Yahoo!, which runs the world's most popular Web site.

Through February, Google held a 35 percent share of the search-engine market, with Yahoo! at 30 percent and Microsoft's MSN at 15 percent, according to comScore, a research firm.

Copyright © 2004 The Seattle Times Company

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