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Wall Street agog over Google

If the popular Internet search engine goes public, other tech companies could take the plunge.

By HELEN HUNTLEY and DAVE GUSSOW
Published April 27, 2004

Could the tech stock mania that ended so painfully four years ago be about to make a resurgence?

Google Inc., which runs the most popular search engine on the Internet, is on the verge of going public in what could become the hottest initial public offering in years.

The Mountain View, Calif., company is expected to announce its plans by the end of the week. If it decides to go public, as many on Wall Street anticipate, it could encourage other tech companies to take the plunge.

"It's probably as big psychologically as it is financially," said Tom Avery, who heads the technology investment banking practice for Raymond James & Associates. "If they're saying it's a good enough time to go public, that signals to a lot of other companies that they probably ought to think about doing the same thing."

No one knows what the initial selling price will be. However, media reports put Google's likely market value at $25-billion, which is less than eBay and Amazon.com, but more than many large, established companies like Sears, Roebuck and Marriott International. The Tampa Bay area's most valuable company is Jabil Circuit Inc. with a market value of $5.8-billion.

Although Google is secretive about its finances, some analysts say annual sales could be as much as $1-billion with profits of $150-million to $350-million.

"These are guys who have one of the best brands ever created in such a short time," said Steve Berkowitz, chief executive of competitor Ask Jeeves Inc., which went public in 1999. "There's so much value in Google, it's hard to think they're not going to want to unlock some of that."

Part of the allure may be that Google's founders, Larry Page and Sergey Brin, are said to be reluctant to go public even though they stand to make billions.

Page, 31, and Brin, 30, who started Google as Stanford graduate students, like the freedom they have as a private company. They met in 1995 at a party for incoming computer science graduate students, worked together on a university-funded data-mining project. In the project they invented the search technology that would eventually be Google's core technology.

"The university owns the technology," said Katharine Ku, the director of the Office of Technology Licensing at Stanford. "We license it to Google, which back then was just these two kids. They pay Stanford royalties annually. We also took a bit of stock in the deal."

Despite the queries that return 753,000 Internet links in 0.34 second, Google is by no means a fount of human knowledge. It is short on history, since most Web pages have been created since 1995, and it is overloaded with sex, sports, conspiracy theories and pop stars. Its algorithm for indexing search results is based on popularity, not necessarily accuracy. The more links a Web page has, the higher its rank on Google.

Page and Brin prize Google's quirky culture, which includes an array of colorful office toys, roller-hockey games, free meals prepared by the Grateful Dead's former chef and a business mandate requiring workers to devote one day per week to their own pet projects.

The freewheeling approach might not be embraced by hard-nosed investors likely to demand more financial discipline in the perennial quest for higher profits, said Boston lawyer David Walek, who has participated in a dozen IPOs as the co-head of Ropes & Gray's high-tech practice.

Public companies are subject to strict disclosure requirements, public scrutiny and the fickleness of investors. Stock price volatility, shareholder lawsuits and Securities and Exchange Commission filings are part of life in the public arena.

In fact, it is SEC rules that are pushing Google to make a decision on the company's direction. When companies have more than 500 shareholders and assets of more than $10-million, they are required to disclose detailed financial information just as they would if they were public. Google crossed the threshold earlier this year when it combined Google Inc. and Google Technologies into a single company, and now faces a disclosure deadline this week.

Google might simply file the disclosure documents without announcing an offering, but if it does, it will disappoint a lot of people on Wall Street. The Wall Street Journal reported that Google already has picked the two brokerages that will lead the offering efforts, Credit Suisse First Boston and Morgan Stanley. Other companies that are likely to be involved in secondary roles are Goldman Sachs Group, Citigroup, J.P. Morgan Chase & Co. and Lehman Brothers Holdings, according to the Journal.

Page and Brin own between a third and half the company's outstanding stock, but they also have to take into account Google employees, who are shareholders, and the venture capitalists who have invested millions in the company.

"When you take on venture capital investors, one of the understandings is that they want liquidity on their investments at some period of time, either through an IPO or the sale of the company," said Avery, who works for Raymond James out of an office in Atlanta.

The investor groups put together by venture capitalists include celebrities from the sports and business worlds ranging from Tiger Woods and Shaquille O'Neal to Netscape founder Marc Andreessen, Napster creator Shawn Fanning and an eBay founder, Pierre Omidyar.

Some of the investors may be able to sell their shares as part of the initial public offering. Even if they don't sell them then, the offering opens up the potential for them to sell later after the stock is trading in the open market.

Analysts and investors will be watching Google closely.

"If Google is successful, it will help pull the sector forward," said Don Williams, a partner with Ernst & Young's venture capital consulting practice. "If Google has a poor experience, it will have a much larger ripple effect."

The IPO market for tech companies, which dried up after the Nasdaq Stock Market plunged in 2000 and 2001, began to show some real signs of life when the stock market turned up last year. Sixteen technology companies have had initial offerings this year with an average price gain of 16.6 percent, according to IPO Monitor. However, none of them has the size or the name recognition of Google.

Beyond the financial implications of Google's possible stock sale, many wonder what taking an energetic private company public will do to its culture and services.

For example, key employees could decide to leave if they become instant millionaires. Google also likes to work at its own pace, slowly testing services before it rolls them out. Will investors be as patient?

Google has impressive numbers on its side, according to a report by Patrick Mahoney, an analyst with the Yankee Group research firm: an 80 percent market share, 200-million searches a day and sales revenue last year of about $1-billion, resulting in a $350-million profit.

But it also has heavyweight competition coming from Microsoft and Yahoo. "MSN and Yahoo have large teams of programmers and technology-savvy staff that undoubtedly work tirelessly to loosen Google's stronghold," Mahoney wrote. "There is much to be said for a company, less than 10 years old, of which Bill Gates said, "they kicked our butts,' as he did in January; very few earn that honor."

- Information from Times wires was used in this report.

Google Q & A

Q. Can I get in on the initial public offering?

A. That depends on how the offering is conducted. Usually, shares of popular IPOs are parceled out to the best customers of the brokerage firms that are part of the underwriting. Institutional investors, such as mutual funds, get most of them. However, news reports say Google is considering a less conventional approach in which individual investors would be able to order shares online. Once shares begin trading, anybody with a brokerage account can buy them. However, it's often cheaper to wait until after any hoopla has died down.

Q. How much, if at all, will this change the Google Web site?

A. It probably won't affect how the Web site looks or the search engine functions. But some experts suggest that Google may have to speed up development of new services to please investors. For example, it tested Froogle, its comparison-shopping site, for a year before making it available. Whether investors will be that patient is unknown.

Q. What does this mean for tech stocks?

A. If investors go crazy for Google, it will open the doors for other technology stocks to make public offerings of their own. If Google flops, the reverse will be true. Selling stock is a cheap way for companies to raise capital to expand. When the equity markets are closed to them, companies raise money through private funding and loans.

Q. Who will benefit most?

A. Google founders Sergey Brin and Larry Page, employees and early investors in the company. The investors include venture capital firms and celebrities such as Tiger Woods, Shaquille O'Neal and Henry Kissinger.

Q. Why all the hoopla?

A. Google is the most popular search engine with a well-known brand name and a profitable business model. Some analysts are projecting that Google stock would be worth $25-billion, making it more valuable than the stock of many larger, more established companies such as Lockheed Martin.

Q. What is a Google?

A. According to the company's Web site, "Google is a play on the word googol, which was coined by Milton Sirotta, nephew of American mathematician Edward Kasner, to refer to the number represented by 1 followed by 100 zeros. Google's use of the term reflects the company's mission to organize the immense amount of information available on the Web." While many people use the word as a verb now ("I'm going to google for . . . "), it is not listed in the dictionary.

Q. How does Google work?

A. Google has become popular because its formula tends to return the most relevant results. The technology is built around a secret formula called "Page Rank" that rates the relevance of Web sites based on the number of links from other relevant Web sites. The method has raised concerns that Google has created a caste system in which a group of elite Web sites largely determine the popularity of other sites.

- Information from the Associated Press was used in this report.

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