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Google sets up IPO with a twist

The search engine company said in a much-anticipated filing that an auction will determine the value of its initial public offering.

Associated Press
Published April 30, 2004

SAN FRANCISCO - Internet search engine leader Google Inc. filed its long-awaited IPO plans Thursday, thumbing its nose at Wall Street's traditions even as the company prepares to cash in on its meteoric success.

Without specifying a price per share, Google said it hopes to raise $2.7-billion with an initial public offering that has created the biggest high-tech buzz since the dot-com bubble burst four years ago.

The IPO is expected to give Google a market value of at least $20-billion, creating scores of new Silicon Valley millionaires - including many of the company's 1,900 employees at its Mountain View, Calif., headquarters, a hub known as the Googleplex.

But even as it prepared to dance with the Wall Street bankers who will take it public, Google warned investors it won't take orders from the markets.

"Google is not a conventional company. We do not intend to become one," co-founders Larry Page and Sergey Brin wrote in an open letter included in the IPO filing.

As expected, Google said the price of its IPO will be determined through an auction designed to give the general public a better chance to buy its stock before the shares begin trading, most likely in late summer or early fall. Google picked two long-established investment bankers - Morgan Stanley and Credit Suisse First Boston - to manage its populist IPO approach.

Although Google's stock won't be sold for several more months, the filing represents a significant milestone in the 51/2-year-old company's evolution from a fun-loving startup to a corporate adolescent. Google has done well so far, according to a filing that shined a light on the privately held company's finances for the first time.

Depending almost entirely on advertising linked to online searches, Google earned $105.6-million, or 41 cents a share, on revenue of $962-million last year. Google started this year even better, with a first-quarter profit of $64-million, or 24 cents a share - more than doubling its earnings of $25.8-million, or 10 cents a share, at the same time last year.

By going public, Google will be under greater pressure to produce steady earnings growth - an expectation that some executives say leads to shortsighted management decisions.

But Google says it won't fall into that trap, striving to remain true to the vision of Page and Brin, former Stanford University graduate students who founded the company in 1998. In one of its first rebellious steps, Google will refuse to project its earnings from quarter to quarter, according to the letter signed by Page and Brin.

"A management team distracted by a series of short-term targets is as pointless as a dieter stepping on a scale every half-hour," they wrote.

To insulate themselves from outside pressure, Page and Brin are creating a two-class stock hierarchy designed to give them veto power. The company is selling Class A common stock to the public, but Page and Brin will control Class B stock, which will have 10 times the voting power.

The setup is similar to systems used by several major media companies and Berkshire Hathaway Inc., run by stock market sage Warren Buffett.

Thursday's filing emphasized that both Page, 31, and Brin, 30, intend to remain Google's hands-on leaders, making all key deci-sions with CEO Eric Schmidt, a former top executive at Sun Microsystems Inc. and Novell Inc.

The crucial importance of Internet searching and Google's ability to become tremendously profitable based on presenting search results next to lists of paid text advertising has turned the Web world upside down. Now both Yahoo Inc. and Microsoft Corp. are scrambling to catch up with Google in searches, and Google itself is racing to directly confront both Microsoft and others by offering a wide array of Web services.

WORD FOR WORD

Google's SEC filing Thursday includes an unusual letter from founders Larry Page and Sergey Brin to prospective shareholders, explaining their philosophy and the company's way of doing business. Here are excerpts from that letter:

SERVING END USERS: 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. 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. We are proud of the products we have built, and we hope that those we create in the future will have an even greater positive impact on the world.

LONG-TERM FOCUS: As a private company, we have concentrated on the long term, and this has served us well. As a public company, we will do the same. If opportunities arise that might cause us to sacrifice short-term results but are in the best long-term interest of our shareholders, we will take those opportunities.

Although we may discuss long-term trends in our business, we do not plan to give earnings guidance in the traditional sense. A management team distracted by a series of short-term targets is as pointless as a dieter stepping on a scale every half-hour.

RISK VS REWARD IN THE LONG RUN: Our business environment changes rapidly and needs long-term investment. We will not hesitate to place major bets on promising new opportunities. We will not shy away from high-risk, high-reward projects because of short-term earnings pressure. Some of our past bets have gone extraordinarily well, and others have not. Do not be surprised if we place smaller bets in areas that seem very speculative or even strange. As the ratio of reward to risk increases, we will accept projects further outside our normal areas, especially when the initial investment is small.

EXECUTIVE ROLES: We run Google as a triumvirate. Sergey and I have worked closely together for the last eight years, five at Google. Eric (Schmidt), our CEO, joined Google three years ago. The three of us run the company collaboratively with Sergey and me as presidents. The structure is unconventional, but we have worked successfully in this way. To facilitate timely decisions, Eric, Sergey and I meet daily to update each other on the business and to focus our collaborative thinking on the most important and immediate issues. Decisions are often made by one of us, with the others being briefed later. This works because we have tremendous trust and respect for each other and we generally think alike. For important decisions, we discuss the issue with the larger team.

CORPORATE STRUCTURE: 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. New investors will fully share in Google's long-term growth but will have less influence over its strategic decisions than they would at most public companies.

We believe a well functioning society should have abundant, free and unbiased access to high quality information. Google therefore has a responsibility to the world. The dual-class structure helps ensure that this responsibility is met. We believe that fulfilling this responsibility will deliver increased value to our shareholders.

BECOMING A PUBLIC COMPANY: Our growth has reduced some of the advantages of private ownership. By law, certain private companies must report as if they were public companies. The deadline imposed by this requirement accelerated our decision. As a smaller private company, Google kept business information closely held, and we believe this helped us against competitors. But, as we grow larger, information becomes more widely known. As a public company, we will of course provide you with all information required by law, and we will also do our best to explain our actions. But we will not unnecessarily disclose all of our strengths, strategies and intentions.

DON'T BE EVIL: We believe strongly that in the long term, we will be better served - as shareholders and in all other ways - by a company that does good things for the world even if we forgo some short-term gains. This is an important aspect of our culture and is broadly shared within the company. Google users trust our systems to help them with important decisions: medical, financial and many others. Our search results are the best we know how to produce. They are unbiased and objective, and we do not accept payment for them or for inclusion or more frequent updating. We also display advertising, which we work hard to make relevant, and we label it clearly. This is similar to a newspaper, where the advertisements are clear and the articles are not influenced by the advertisers' payments. We believe it is important for everyone to have access to the best information and research, not only to the information people pay for you to see.

MAKING THE WORLD A BETTER PLACE: We aspire to make Google an institution that makes the world a better place. With our products, Google connects people and information all around the world for free. We are adding other powerful services such as Gmail that provides an efficient one gigabyte Gmail account for free. By releasing services for free, we hope to help bridge the digital divide. AdWords connects users and advertisers efficiently, helping both. AdSense helps fund a huge variety of online web sites and enables authors who could not otherwise publish. Last year we created Google Grants - a growing program in which hundreds of non-profits addressing issues, including the environment, poverty and human rights, receive free advertising. And now, we are in the process of establishing the Google Foundation. We intend to contribute significant resources to the foundation, including employee time and approximately 1 percent of Google's equity and profits in some form. We hope someday this institution may eclipse Google itself in terms of overall world impact by ambitiously applying innovation and significant resources to the largest of the world's problems.

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