Google plans to become a public company have been
rumoured for months and the expectations for its IPO are extremely
high in the technology sector.
The proposed maximum aggregate offering price $2.72bn.
Morgan Stanley and Credit Suisse First Boston are the
underwriters and they will be in charge of conducting an auction
process on Google's behalf to determine the IPO price, a method
Google acknowledges is unconventional in the US. The auction will
consist of five stages - qualification; bidding; auction closing;
pricing; and allocation.
"It is important to us to have a fair process for our IPO that
is inclusive of both small and large investors. It is also crucial
that we achieve a good outcome for Google and its shareholders.
This has led us to pursue an auction-based IPO for our entire
offering," the filing reads.
"Our goal is to have a share price that reflects a fair market
valuation of Google and that moves rationally based on changes in
our business and the stock market."
The company will have both Class A and Class B common stock, or
a dual-class voting structure, which is designed to give the
company's management more control over the company after it goes
public. "We have a dual-class structure that is biased toward
stability and independence," the filing reads.
The Class B common stock will have 10 votes per share and the
Class A common stock, which is the stock that will be sold in this
offering, will have one vote per share. This will limit Class A
stockholders' ability to "influence corporate matters".
Google's executive team had, so far, resisted taking the company
public. Founded in 1998, Google is, reportedly, profitable and the
most widely used search engine, but competition is heating up, as
Microsoft and Yahoo invest heavily in improving their own search
technologies.
"From what we can tell, Google is running a healthy profit now,
so they don't need the IPO cash to survive," said analyst David
Schatsky from Jupiter Research, on Wednesday, before Google filed
for the IPO.
Indeed, in its filing Google revealed that it closed 2003 with
net income of $105.6m and revenue of $961.9m. The company has been
profitable since 2001, when it had $6.9m in net income and $86.4m
in revenue.
In its filing, Google said it will use the IPO net proceeds for
general corporate purposes, such as sales and marketing expenses,
research and development expenses and general and administrative
expenses; capital expenditures; and possible acquisitions of
businesses, technologies or other assets, although it at present
has no agreement or commitments with respect to any material
acquisitions.
However, two main drivers may be at work in prompting Google to
go public. First, the company may be facing mounting pressure to
reward investors and employees who have stock options; and second,
executives probably understand that they are in an increasingly
competitive environment and need more money to develop new services
to make Google more attractive to users.
One way of doing that is through services such as the recently
announced - and controversial - Google web-based e-mail service,
called Gmail, and through features that let users personalise their
Google search experience.
An e-mail service links users more tightly with Google and gives
them a reason to visit the site regularly, while personalisation
ties users with the Google search features.
It is very likely that Google already has in the works a host of
applications to go head to head against Yahoo and Microsoft, and
could use the IPO cash influx to boost their development, said
Patrick Mahoney, a Yankee Group analyst, before the Google IPO
registration.
"I can see Google preparing an instant messaging service for
example," he said. He also expected to see content-related services
and a continued push into the local-search market, which lets users
tailor searches based on geographical parameters, and consequently
opens up more advertising possibilities.
Google might also use the IPO cash to go shopping for companies
that have or are developing this type of complementary technology
and services, Mahoney said. However, he did not expect Google to be
indiscriminate and overly aggressive in this area. "There's the
potential for acquisitions, yes, but Google is very proud of its
proprietary technology so any acquisition they make will require a
good amount of integration into their technology."
The Internet search market has become increasingly lucrative in
recent years as search engines sell advertising matching individual
searches. For example, a seller of sporting equipment may pay
Google to post its ad when a user enters search keywords such as
"basketball", "baseball bat" or "tennis".
Advertising tied to keyword searching was the fastest growing
and the biggest of all US internet advertising categories in 2003,
according to a report published in April by the Interactive
Advertising Bureau and conducted by independently by
PricewaterhouseCoopers.
Keyword search revenue made up 15% of online ad revenue in 2002,
and jumped to 35% in 2003. The rest of the 2003 US internet
advertising pie was made up of display advertising (ad banners)
with 21% (down from 29% in 2002), classifieds with 17% (up from
15% in 2002) and rich media advertising with 8% (up from 5% in
2002), according to the report. Internet advertising for all of
2003 reached just under $7.3bn, up nearly 21% from 2002.
To sustain and grow an advertising-driven business, an internet
company has to attract and retain visitors. "In the most basic
sense, one of the most important components of a successful
advertising medium is a loyal and active user base, and
applications such as e-mail help increase that loyalty, because of
the stickiness effect," said Graham Mudd, an analyst with market
researcher comScore Networks, before Google filed its IPO
registration.
"Google's introduction of Gmail in a lot of ways signals an
intention to move into lines of business generally associated with
web portals. I wouldn't be surprised if the new capital were used
to develop efforts similar to Gmail," Mudd added.
Gmail is in early testing phase and only available to a very
small set of users, but it has already generated a strident
controversy, as privacy advocates have rushed to condemn Google's
plan to include ads in the body of e-mail messages based on an
analysis of the messages text.
Google would detect, for example, that a message mentions the
word "boat" many times, and thus include an ad from a maker of
marine equipment. Critics say this amounts to Google snooping on
users' e-mail messages. Google says the technology it would employ
to analyse the text of messages is no more intrusive than the
technology used to scan e-mail messages for viruses and filter out
spam.
It is unlikely that the Gmail controversy will backfire on
Google, Yankee's Mahoney said. "While the scepticism was justified,
I don't think the level of controversy was. After all, if you don't
like Gmail, don't use it," Mahoney said. "If Google can pull this
off in a non-invasive form and make consumers feel secure, there's
a good percentage of consumers out there who won't care.
"It's basically all computer-generated scanning, so the invasive
argument isn't necessarily the strongest argument against it,
because there are other invasive e-mail technologies out there,"
Mahoney added. "However, consumers don't like to see a lot of
advertising and that could be a problem. I see the service as being
potentially more irritating than invasive."
The Google IPO filing had been widely expected to happen this
week, when an SEC regulation would have forced the company,
although privately held, to disclose financial information. Thus,
the company would have regulatory disclosure hassles and paperwork
without the benefit of an IPO's cash influx.
Google acknowledged this in its filing. "By law, certain private
companies must report as if they were public companies. The
deadline imposed by this requirement accelerated our decision.
"
Google leads in search engine usage both in the US and globally,
according to comScore. About 35% of internet searches in the US in
February were done using Google. Yahoo came in second place with
30%, and Microsoft's MSN a distant third with 15.4%.
Worldwide, Google accounted for 43% of all searches, followed by
Yahoo with 31% and Microsoft's MSN with 14.1%, according to
comScore.
In terms of unique visitors, Google also rules among search
sites, with just over 65 million US users visiting it in March, up
23.5% from March 2003, according to comScore. Yahoo's search site
came in second, with 59.8 million unique visitors, followed by
Microsoft's MSN search site with 49.9 million.
"Google is in a good position now because the company is thought
of as a new and innovative brand. They made a market out of
internet search, which people like MSN once thought of as laughable
and not worth getting into," Mahoney said.
Google was founded in September 1998 by then Stanford University
graduate students Larry Page and Sergey Brin, who are the company's
president of products and president of technology respectively.
Eric Schmidt is the chairman and chief executive officer.
As a privately held company, Google's primary financial backing
has come from Kleiner Perkins Caufield & Byers and Sequoia
Capital, which together led an equity round of $25m in June 1999,
according to Google's website.
Juan Carlos Perez writes for IDG News
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