Google Goes Public

[rtroxel]

Google "went public" this week, filing its application with the
Securities and Exchange Commission in Washington, DC. Predictably,
speculation is running rampant across the Web as to how this will affect Google users and
investors.

(At this point I should say that I'm not an accountant or
financial advisor and if you're really interested in investing
in Google, then you should consult experts in the investing
field.)

Reading through all the material posted on the Web this
week, I've concluded that Google's IPO, which will become
official in about 60 days, will be unique, if nothing else.

For one thing, the value of shares sold is expected to quickly
reach the $20 billion level, higher than any IPO in recent
years and reminiscent of the dot-com boom of the 1990s. Google's
method of offering the shares for sale is unique however:
They are being offered at an auction that will be conducted
over the Internet. This has never been done in the US before,
but has been done with varying degrees of success in Europe.

Google has been a highly successful private company, exceeding
its founders' wildest dreams. Its unique corporate structure
and altruistic goals recall the early days of the Open Source
movement, while its business "enthusiasm" recalls the many
optimistic and exciting startup days of the high-tech businesses
of the 1990s. On a technical level, Google's search engine
algorithms and advertising methods have so far outstripped
all competitors, including MSN and Yahoo. Its hardware solution,
Google Search Appliance, has been embraced by numerous high-profile
corporations, including BankOne and Kaiser Permanente.

Now for some statistics. According to Google's filing notice,
the company's first-quarter net income this year was $64 million,
while its revenue was $389.6 million. (This adds up to a higher
profit margin than either Yahoo or Microsoft.) According to
Bloomberg News Service, the Google Web site was used
for 34.7% of all Internet searches in the US in February,
2004. Yahoo was used for 30% and MSN for 15%. It should be
added, of course, that Yahoo has used Google's search engine
in the past. In the future, however, both companies will be
using their own search technologies, and will provide competition
for Google.

In other words, there has been some major search engine churning
over the past year and with Google's IPO we shall be seeing
more churn as a number of smaller engine companies begin to
startup.

Questions

Some financial obsevers, however, like Bill Mann of Motley
Fool have questions about the future of Google:

"...I'll be keeping my investment dollars very far, far away
from Google. It doesn't matter where the thing gets priced
- people are going to buy, and they're going to think that
riches await. After all, people who got in early on eBay,
Amazon.com, and Yahoo did spectacularly, no?

"Keep in mind though, that none of these companies came public
anywhere near market capitalizations of $25 billion. People
got wealthy with these companies because they got in on the
ground floor... This IPO is for the benefit of the insiders..."

If Google was such an innovative and successful company
already, why did they decide to go public? Most companies
go public to attract additional investors' cash so they can
expand.

If the company does go public, what changes will be made?
Will there be more advertising? Will stockholders want the
company to become more profitable, at the expense of quality
service?
According to the New York Times:

"A list of the others who stand to be enriched should Google
go public seems to prove that the rich get richer. It reads
like a "Who's Who" of Silicon Valley insiders, including Frank
P. Quattrone, the former investment banker now on trial in
Manhattan on charges of obstruction of justice and witness
tampering.

"It includes some of Silicon Valley's greatest entrepreneurial
successes, including Marc Andreessen, the founder of Netscape;
Pierre M. Omidyar, a founder of eBay; Shawn Fanning, the creator
of Napster; and Bill Joy, the software innovator who recently
left Sun Microsystems."

The Players

The Google search engine is the invention of two men, Sergey
Brin and Larry Page. Brin, 30, came to the US with his parents
when he was six. He eventually studied computer science at
the University of Maryland and at Stanford, where he met Larry
Page. Page, 31, was given his first computer by his father,
a computer science professor at Michigan State University.
In 1996, Page and Brin were developing a new Internet search
technology they called Back Rub (for its ability to analyze
"back links", the pointers from one Web site to another.

In 1998, their work received the attention of Andy Bechtolsheim,
a cofounder of Sun Microsystems loaned them $100,00 to start
their business. By 1999, their service, now named Google,
was attracting the attention of major Silicon Valley investors,
and the company moved to a new suite of offices in Palo Alto.

Today, Google has 1,900 employees working in the "GooglePlex",
the company's current headquarters/campus. Since that time,
numerous new executives have been hired, including the present
CEO, Eric Schmidt. Schmidt's considerable track record includes
a PhD in Computer Science and past executive positions at
Novell and Sun.

All three men credit Google's success partly to its working
environment, which includes casual dress, "meals free of charge,
doctors and washing machines."

Don't Be Evil

"Don't Be Evil" is the recurrent slogan and philosophy in
the Google Owners' Manual. Brin and Page elaborate on it this
way:

Sergey and I founded Google because we believed we could
provide a great service to the world-instantly delivering
relevant information on any topic. Serving our end users is
at the heart of what we do and remains our number one priority.
We believe a well-functioning society should have abundant,
free and unbiased access..."

Our goal is to develop services that improve the lives
of as many people as possible-to do things that matter. We
make our services as widely available as we can by supporting
over 97 languages and by providing most services for free.
Advertising is our principal source of revenue, and the ads
we provide are relevant and useful rather than intrusive and
annoying. We strive to provide users with great commercial
information.

The Auction

At its online auction, Google plans to sell up to $2.7 billion
in stock.

The auction will make shares available "equally" to institutions
and individuals willing to pay the going price. However, the
SEC filing notice declares that all 1900 Google employees,
as of March 31, already own shares. These employees and other
insiders own what is called Class B stocks which are valued
at ten times the Class A stocks which Google is offering to
the public through this auction. This two-tiered stock ownership
structure will insulate management from the pressure of having
to crank high quarterly earnings. It also discourages short-term
goals. Obviously, this gives the current stockholders not
only more monetary value, but also ten times the voting power
of the Class A stockholders.

According to the founders:

We are creating a corporate structure that is designed
for stability over long time horizons. By investing in Google,
you are placing an unusual long-term bet on the team, especially
Sergey and me, and on our innovative approach. We want Google
to become an important and significant institution. That takes
time, stability and independence. We bridge the media and
technology industries, both of which have experienced considerable
consolidation and attempted hostile takeovers. In the transition
to public ownership, we have set up a corporate structure
that will make it harder for outside parties to take over
or influence Google. This structure will also make it easier
for our management team to follow the long term, innovative
approach emphasized earlier.

In other words, the company's shares will not be subject
to the whims of Wall Street and its brokers, eager to make
commissions on the frequent buying and selling of stock -
any stock. Also the Class B insiders will have a vested interest
in the company; i.e., their wealth will be directly dependent
on the future success of Google. This will hopefully eliminate
the insider trading scandals like the ones that recently brought
down Martha Stewart and several mutual fund companies.

But there are other problems with this seemingly democratic
auction method:

1. If the price bid by the initial buyers goes too high,
there may be few takers later, when the shares start trading
on the New York stock exchange.

2. Is a stock really like a painting or an antique, whose
value is a lot easier to determine?

3. The Owner's Manual itself warns of the "winner's curse."
Investors will bid up the clearing price and then quickly
unload their shares. This will not be a problem for long-term
investors, however, only day-traders looking for the quick
turn-arounds.

Competition and Risks

But will Google be a truly good long-term investment?

In its S-1 statement, Google owners mention several dozen
risk factors that come with the stock, not the least of which
is competition from rival search engine companies. Both Yahoo
and MSN are mentioned by name, but there are smaller upstarts
as well, including Quigo or Industry Brains. These companies are aiming for more "personalized"
search result methods. They are also hoping to jump aboard
the search advertising market, which Google has been dominating
so far, because of its unobtrusive advertising methods. Other
goals of the smaller search companies include the development
of algorithms "to decode the themes of Web page content to
better match queries." For example, startup Dipsie's motto is "Find what You're Looking for within 2 clicks." They
are developing a proprietary semantics-based technology while
Quigo is working on a method for Web publishers to deliver
contextually relevant ads.

The reason for the rise of smaller search engine companies?
The common gripe of many publishers is that with the enormous
networks of Overture or Google, they're often lumped in with
many other publishers not of the same caliber, hampering their
ability to get higher rates from advertisers. Advertisers,
on the other hand, complain that they can't target their text-based
listings to specific sites.

Yet other search companies are working on tools to organize
search results around specific topics. For example, a query
for "Paris Hilton" would separate results for the luxury hotel
chain from the publicity-seeking heiress of the same name."

Other Risks

Many of the risks mentioned in the Owners' Manual are those
included in any IPO, but there are several unique to Google:

Proprietary document formats may limit the effectiveness
of our search technology by excluding the content of documents
in such formats.

New technologies could block our ads, which would harm
our business.

If we fail to detect click-through fraud, we could lose
the confidence of our advertisers, thereby causing our business
to suffer.

We are susceptible to index spammers who could harm the
integrity of our web search results. More individuals are
using non-PC devices to access the Internet, and versions
of our web search technology developed for these devices may
not be widely adopted by users of these devices.

Acquisitions could result in operating difficulties, dilution
and other harmful consequences.

We do not intend to pay dividends on our common stock.


Additionally, Google might need to expand its services.

Yahoo, for example, is getting much new revenue from selling
email storage space. online dating services and a broadband
service in partnership with SBC communications.

In response to this, Google is currently developing a new
free email service, G-Mail. They're trying to this without
"diluting" their search pages with too many extra services.
Google's current "additional services" include Froogle, an
e-shopping search service which displays merchandise based
on individual consumer search criteria. There is also Adwords,
which now appear on thousands of Web sites, and a hardware
device called the Google Search Appliance.

And in case you're interested...

How Froogle works

Google's spiders locate products for sale. Merchants also
submit information. Ranking software generates search results.
This provides a speedy way to search stores online for products.
No shopping cart, wallet, no promotion of stores or products.
No "preferred" merchants allowed to appear first. (User doesn't
buy products directly from Froogle.)

Google Search Appliance

They call it "Google in a box".

The technology that powers Google.com was put to work in
a plug-and-play search solution, integrating hardware, software
and support.

The Search Appliance crawls all platforms without distinction,
capturing data on highly distributed, heterogeneous networks
in a single coherent view. Intelligent algorithms automatically
detect network settings, heuristics recognize date formats,
languages, and spelling mistakes."

[ccarte2]

cant wait