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Google files IPO
April 29, 2004

Google, the world's No. 1 Internet search engine, finally filed for its initial public stock offering Thursday and promised to maintain its long-term focus even though it will soon face the intense scrutiny of Wall Street.

The company said in a filing with the Securities and Exchange Commission that it expects to raise as much as $2.7 billion from the offering, which it will conduct in the unusual format of an online auction in a bid to make its shares more widely available. Morgan Stanley and Credit Suisse First Boston were named as the lead underwriters for the deal.

The company's IPO filing has been rumored for the better part of a year and recent speculation has created a buzz about Internet stocks not seen since online auctioneer eBay went public in September 1998.

Wall Street has been eagerly anticipating a filing from Google so investors could finally get a glimpse into the company's finances.

In the filing, Google said that it generated revenues of $961.9 million in 2003 and reported a net profit of $106.5 million. Sales rose 177 percent from a year ago although earnings increased by just 6 percent. Google also revealed that has been profitable since 2001.

For the first quarter of 2004, Google reported sales of $389.6 million, an increase of 118 percent from a year ago. Net income was $64 million, up 148 percent from the first quarter of 2003.

Google's core business of selling search-based advertising, which allows companies to purchase ads tied to specific keyword searches, is one of the most lucrative and rapidly growing markets in the tech sector.

Google, founded in 1998 by former Stanford University students Sergey Brin and Larry Page, has quickly become one of the most successful Internet companies, thanks to search technology that many experts say is superior to offerings from rivals. (For more on the founders' stakes in Google and their pay,

Eric Schmidt, the former CEO of Novell and chief technology officer at Sun Microsystems, joined Google as its chairman in March 2001 and was named CEO later that year.

The company has become not just a tech juggernaut but a popular culture phenomenon as well, with people using the verb "Googled" to describe searching for information on the site.

And during the past few months, Google has stepped up its efforts to compete against large Internet companies such as Yahoo!, Microsoft's MSN, Time Warner's AOL and Amazon.com.

Google recently launched a comparison shopping Web site called Froogle and a test version of a local search engine.

The company also is testing a controversial free e-mail service called Gmail, which provides far more storage space than most other Web-based e-mail offerings. Google has said it intends to sell ads that will be tied to keywords in e-mails, which has raised some privacy concerns.

Now that Google has filed to go public, the search business could become even more intense, said Safa Rashtchy, an analyst with Piper Jaffray.

"The competition between Google and Yahoo! and MSN will certainly intensify," Rashtchy, "They are already heavily competing to make sure that each gets their share of the search business."

According to research firm comScore Networks, Google sites had nearly 35 percent of Web searches conducted in the United States in February, making it the market share leader. Yahoo! was second with 30 percent of searches. Worldwide, Google had an even bigger lead over Yahoo!, with 43 percent of searches, compared to 31 percent for Yahoo!

Many tech investors have been hoping that an IPO filing from Google will lead to another tech boom period. But one hedge fund manager said he does not think Google's filing will cause a flood of new Internet and technology companies.

"There's always a tremendous amount of buzz with Internet IPOs but I don't think we'll go back to people getting excited about all Internet stocks like in the late '90s," said Peter Thiel, managing member with hedge fund firm Clarium Capital. "Google is going public because it's profitable. This is not a publicity stunt."

Thiel was the co-founder of PayPal, which went public in 2001 and was sold to eBay a year later.

Demand for Google's shares is expected to be extremely high. As such, Brin and Page said in a letter included in the filing that the company intends to use the auction process to price its shares.

"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 current shareholders," the co-founders wrote. "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."

During the late '90s, many tech IPOs rose sharply on their first day of trading because a small amount of shares were available to the public.

"Many companies have suffered from unreasonable speculation, small initial share float, and boom-bust cycles that hurt them and their investors in the long run. We believe that an auction-based IPO will minimize these problems," Brin and Page said.

As part of the auction process, interested investors will need to get a unique bidder ID from a Web site, the company said in the filing. Qualified investors would then be able to submit a bid detailing how many shares they wanted and at what price. Once the underwriters have determined the stock's opening price, shares will be allocated, the company said.

The auction process is fairly unique, particularly for a company of Google's stature. But Google has a reputation of doing things differently, which should make for some interesting times once the company starts trading.

Brin and Page pledged in their letter that they will not play the game of managing expectations, trying to meet quarterly earnings estimates just to appease Wall Street. The two even quoted legendary value investor Warren Buffett.

"In Warren Buffett's words, 'We won't "smooth" quarterly or annual results: If earnings figures are lumpy when they reach headquarters, they will be lumpy when they reach you'," the two wrote.

In addition, the offering is structured in a way so that Brin and Page will continue to have strong control of the company's fate. Brin and Page own nearly a third of the company's Class B stock, which has 10 times the voting power of the Class A shares to be sold in the public offering.

Google did not say in its filing whether it intends to list on the New York Stock Exchange or the Nasdaq. Most of its competitors list on the Nasdaq.

Since Google did not say how many shares it intends to sell or what the price would be, investors can still only speculate about how much Google will be worth when it goes public.

It probably makes the most sense to compare Google with Yahoo! since it is Google's main rival. Yahoo! reported net income of about $238 million last year and has a market value of about $36 billion. So it is valued at 151 times trailing net income. Based on that multiple, Google's stock market value would be about $16 billion.

But Google would be worth more if you looked at a price to sales ratio. Yahoo! is valued at about 24.5 times 2003 revenues of about $1.47 billion. Using that multiple, Google could have a market worth of about $24 billion.

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