Google IPO at $2.7 billion

Lisa Baertlein

SAN FRANCISCO: Google Inc., whose name is synonymous with Internet searches, informed that it planned to go public by selling $2.7 billion in stock through a novel online auction in the most-anticipated Internet IPO since Netscape in 1995.

The planned initial public offering promised to enrich the founders and early backers of the unconventional six-year-old company, which posted revenue of almost $1 billion last year.

It also set the stage for a new round of competition for Internet advertising dollars between Google and deep-pocketed rivals Microsoft Corp. and Yahoo Inc.

In keeping with Google's quirky culture, co-founders Sergey Brin and Larry Page promised in an "owners manual" for prospective investors that its debut as a public company would not change its culture. In doing so, they repeated the company mantra: "Don't Be Evil."

"Google is not a conventional company. We do not intend to become one," they said, noting that investors could be in for a bumpy ride because they have no intention of smoothing results to match Wall Street expectations and would continue to invest in high-risk, high reward projects.

Google did not provide details on the pricing or expected listing date for its shares, but said they would be sold through an auction designed to even the playing field for smaller investors and "minimize" the "boom-bust cycles" that have characterized other IPOs.

The listing by Google, which survived and prospered through the dot-com shakeout along with companies such as Yahoo and eBay Inc., has been seen as a positive sign for venture capital investors and the IPO market, now recovering from a slump of more than three years.

"Whatever the structure, it's a great company and lots of people are interested," said Benjamin Howe, founding partner of America's Growth Capital in Boston, estimating that shares could be priced before the July 4 U.S. holiday.

Mountain View, California-based Google said it would seek to list either on the Nasdaq Stock Market Inc. market or on the New York Stock Exchange. Morgan Stanley and Credit Suisse First Boston were named as lead underwriters for the offering, which has been expected to generate fees of up $100 million for investment bankers.

Analysts have said the deal could value Google at $20 billion, compared with $36 billion for Yahoo and $285 billion for Microsoft. Google, in its prospectus, said it faces "significant competition" from those two rivals, as well as from traditional media companies. It said it expected that its growth rates will decline and margins will narrow.

PROFITABILITY DETAILED

Google, which turned its first annual profit in 2001 and has been increasingly profitable in each successive year, said its management structure would continue to be run as a "triumvirate" of Page, Brin and Chief Executive Eric Schmidt.

For the first quarter of 2004, Google reported $390 million in revenue and net income of $64 million. Net income doubled from the year-earlier quarter, it said. But the founders cautioned that the company would not issue the quarterly profit targets shareholders and Wall Street have come to expect. "A management team distracted by a series of short-term targets is as pointless as a dieter stepping on a scale every half hour," Page wrote to prospective investors.

First American Technology Fund portfolio manager Barry Randall said statements about operating Google differently "tread the line between idealism and danger. If things go bad ... that's exactly the kind of statement that could come back to haunt somebody."

Google was born of the founders' graduate work at Stanford University and, like Silicon Valley high-tech pioneer Hewlett-Packard Co., had its early offices in a garage. It now receives more than 200 million search queries a day in 97 different languages, about half from people outside the USA, the company says on its Web site.

Google reaps virtually all of its revenue from key-word advertising, which the company rolled out in 2002. That market is expected to grow to $3.2 billion in the United States this year, according to Internet research company eMarketer.

The last six years have seen Google become not just the world's most popular Web search engine but a verb, a household word and a cultural phenomenon. "Googling" is commonly used as shorthand for searching the Web. The company has also become a formidable commercial presence and Web sites and key-word ads that are high in Google's rankings reap millions of dollars in revenue for owners.

To counter possible takeovers, Google said it would have a dual-class voting structure that would give its founders "significant control" over its fate. The structure is common in the media industry, but rare among technology companies.

The Google founders cited the example of such companies as Warren Buffett's Berkshire Hathaway and the New York Times Co. as precedent. Brin, 30 and Page, 31, together own nearly a third of the company's super-voting Class B stock. That class of shares carries 10 votes while the Class A shares, which will be sold in the IPO, carry only a single vote. Venture capital firms Kleiner Perkins Caufield and Byers and Sequoia Capital, which invested a total of $25 million in 1999, each hold about a 10 percent stake, according to the filings.

Schmidt, 48, who was brought in by Brin and Page for his management experience at Novell Inc. and Sun Microsystems Inc., holds about 6 percent of the company.

Google said it had expanded its board to include several heavy hitters, John Hennessy, president of Stanford University, Art Levinson, chief executive of biotech firm Genentech and Paul Otellini, president and chief operating officer of chipmaker Intel Corp.

(Additional reporting by John Poirier and Tim Dobbyn in Washington, Mark McSherry in New York, Dan Sorid and Duncan Martell in San Francisco)

© Reuters