[FoRK] NYTimes.com Article: Google' s Sale of Its Shares Will Defy Wall St. Tradition

khare at alumni.caltech.edu khare at alumni.caltech.edu
Fri Apr 30 11:41:21 PDT 2004

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khare at alumni.caltech.edu

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Google's Sale of Its Shares Will Defy Wall St. Tradition

April 30, 2004


SAN FRANCISCO, April 29 - Ending months of speculation,
Google said Thursday that it would sell shares to public
investors in an unusual auction that represents a stark
shift from the way Silicon Valley companies raised money
during the technology boom of the 1990's. 

The stock offering, which is intended to provide about $2.7
billion in cash when it takes place later this year, is
expected to give Google a market value on Wall Street of at
least $30 billion and perhaps $50 billion or more. It will
transform the two former graduate students who founded it
less than six years ago into instant billionaires several
times over. 

Virtually everything about Google's decision to go public
is a departure from standard practice. 

The secretive company, which quickly emerged as the most
popular method for searching the Internet for information,
plans to conduct an auction intended to make its stock
widely accessible to individual shareholders. At the same
time, it plans to issue two classes of stock so that the
founders can retain far more control than is usually the
case when companies are publicly traded in the stock

And the dry, legalistic language typical of financial
documents was replaced, at least at the beginning, with
something of a manifesto attacking Wall Street's traditions
and the practices of most public corporations. 

"Google is not a conventional company," the founders, Larry
Page and Sergey Brin, proudly wrote in a preface to the
offering that they termed an "Owner's Manual" for Google's
future shareholders. "We do not intend to become one." 

Started in 1998 while Mr. Page, 31, and Mr. Brin, 30, were
still graduate students at Stanford University, Google
challenged the common wisdom of the time that searching the
Web would not be a valuable technology but essentially a
commodity freely offered by the lucrative portals like
Yahoo, America Online and MSN from Microsoft. 

But as outsiders got their first look Thursday at basic
details of Google's finances and business operations, they
found evidence of a company that is both exceptionally
profitable and extraordinarily fast growing. 

Google reported that it earned $106 million on sales of
$962 million last year. But after taking into account
several unusual bookkeeping techniques, Google has actually
generated much greater profits, largely from selling small
targeted text ads tailored to the interests of the more
than 200 million Web searches conducted through Google

Jordan Rohan, an analyst with Schwab Soundview Capital
Markets, calculates that in the first quarter of this year,
Google had pretax profit margins of 59 percent. 

"That is extraordinarily profitable," Mr. Rohan said. "Very
few companies of any sort reach those levels." 

Google's founders started the company with no clear idea
how they would make money and they stumbled into one of the
most potent business concepts in history. Unlike most
advertising, which tries to interrupt and distract people,
advertising on search engines often gives them exactly what
they are looking for. 

And since ads on search engines are simply a few lines of
text and links to Web sites, often purchased simply with
nothing more than a credit card, companies that never could
hire a Madison Avenue advertising agency have been able to
find a way to reach a worldwide audience. Google claims
more than 150,000 individual advertisers. 

Despite the success of the company so far - and what is
almost certain to be heavy demand for shares in its
offering - there is no assurance that the stock will be a
good long-term investment. Many Internet stocks sold to the
public in the past did well initially, but then faltered. 

And the unusual auction method that Google has chosen poses
additional risks. If the price bid by initial buyers goes
too high, there may be few takers once the shares start
trading in the stock market. 

Whatever its ultimate fate, the long-awaited Google public
offering represents a signal moment for Silicon Valley and
the technology industry, which is just beginning to recover
from a devastating slump that followed the collapse of the
dot-com bubble in 2000. 

The industry is now starting to look forward to a new wave
of growth based on the resurgence of the Internet as a
commercial tool. 

This mirrors similar once-a-decade events that started
companies like Intel in the 1970's, Microsoft and Apple
Computer in the 1980's and Netscape in the 1990's, all of
which attracted intense attention and served as the icons
for successive generations of digital technology. 

Silicon Valley executives here praised the unique
achievements of the company but cautioned that anything
like the Google public offering was not expected to happen
again soon. 

"Google today in many ways embodies what is best about
Silicon Valley," said Jim Breyer, managing director of
Accel Partners. 

Venture capitalists warned, however, that even as other
companies line up to follow Google, its decision to go
public was not likely to do anything to directly benefit
the investment climate for most of them. 

"Google is not an icebreaker for other companies to
follow," said John Shoch, a partner at Alloy Ventures.
"It's a polka-dotted zebra." 

The company, based in Mountain View, Calif., provided
detailed financial information for the first time, allowing
outsiders to search through previously closely held secrets
of its finances and operations. 

What emerged is a portrait of a company with higher profit
margins than its most powerful competitors, including Yahoo
and Microsoft, and which many analysts now believe could be
worth more than Yahoo's $36 billion market value and
perhaps come close to the value of eBay, the Internet
auction company that is worth about $54 billion. 

Google, as a private company, has kept hidden even the most
basic details of both its business activities and its
intentions until finally required to reveal them by a
deadline imposed by an arcane law applying to private
companies with more than 500 shareholders. 

Now that its finances are open to scrutiny, analysts were
stunned by what they learned. "If you look at the quarterly
progression," said Andrew Kessler, a Silicon Valley
investor and former Wall Street analyst, "it just ramps and
it's accelerating." 

Like some of the other legends of Silicon Valley, including
those who started Hewlett-Packard and Apple Computer, Mr.
Brin and Mr. Page began Google in a garage. The documents
show that they both earned salaries last year of $150,000,
with bonuses of around $200,000. But each owns shares in
the company that should be worth $3 billion or
substantially more when the company goes public. 

Seeking to prevent a sharp spike in the price of its stock
on the first day of trading, Google said the initial price
would be determined through an auction aimed at giving the
general public a better chance to buy its stock before the
shares begin trading, most likely in late summer or early

The filing begins a 60-day period during which the
Securities and Exchange Commission will review the
registration and can make comments to the company. Once the
agency declares the registration statement effective, the
company can offer its shares to the public. 

Initial public shares of the most sought-after deals
traditionally have been restricted to an elite group picked
by the investment bankers handling the deal. But that
approach produced intense controversies once the Internet
boom faltered, with critics complaining that clients of the
bankers received favored allocations, while others went to
mutual funds in exchange for buying more shares after the
offering to help support the stock. 

Yet Google turned to two long-established Wall Street
investment bankers - Morgan Stanley and Credit Suisse First
Boston - to manage its unconventional approach. 

Experts in such auctions, which are widely used
internationally but are rare in the United States,
cautioned that a wealth of experience overseas suggested a
real possibility that the Google offering could be
dramatically overpriced. 

"What really disappoints me is that Google has chosen a
method that has been in use for 20 years and has failed
everywhere it has been tried," said Ann E. Sherman, an
assistant professor in the department of finance at the
University of Notre Dame and an expert on initial public
offerings auctions. 

"A stock is not like painting," she said. "You can't just
look at a company and know what the value is to you." 

Google's approach, however, does fit closely with the
values of the company as they were outlined in the
founders' preface. 

Despite being at the helm of a publicly traded company, Mr.
Brin and Mr. Page insisted that they would hold on to their
core commitment to letting Google's engineers take wide
risks and that they would not bow to pressures from Wall
Street to show consistent quarterly financial results. 

"As a private company, we have concentrated on the long
term, and this has served us well," they wrote. "As a
public company, we will do the same." 

A spokesman for Google said the company's leaders,
including its chief executive, Eric Schmidt, would not give

Mr. Page and Mr. Brin wrote that they had been inspired by
Warren E. Buffett's essays in the annual reports for his
company, Berkshire Hathaway, and that they would remain
risk takers, willing to place bets that had only a 10
percent chance of earning a billion dollars over a long
period of time. 

The founders also defended their decision to adopt a
dual-class voting structure for the stock, which is rare in
publicly traded companies and generally used only when
long-established family-owned companies like Ford Motor or
The New York Times invite outside investors to buy shares.
They acknowledged that the structure, which keeps voting
power in the hands of the founders and original investors,
would leave insiders with "significant" control over the
company's decisions. 

Separately the company said that it would add three
high-profile Silicon Valley executives as independent
members of its board: John L. Hennessy, Stanford
University's president; Arthur D. Levinson, chief executive
of Genentech; and Paul S. Otellini, president of Intel. 

For all the details in the more than 1,000-page document
the company filed with the S.E.C., one thing remained
constant: Google's secretive nature and the aura that
surrounds it will not go away any time soon. 

"Once again Google becomes the `nobody knows the answer'
company," said Mitchell D. Kertzman, a longtime Silicon
Valley executive and venture capitalist. "At first nobody
knew when it would go public. Now no one knows what the
results of their public offering will be." 



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