A Google IPO could be a headache

A source of money, and of likely woes for management

April 27, 2004|By Chris Gaither | Chris Gaither,LOS ANGELES TIMES

Google Inc., the world's biggest Internet search provider, is widely expected to file papers this week that would declare its intention to raise billions of dollars in an initial public offering.

But should it?

An IPO can bring riches for employees and currency for acquisitions. It also can cause big headaches for management, prompt worker defections and put the company at the mercy of investors focused heavily on quarterly profit targets. And for a company as well-known and profitable as Google, analysts and industry executives said, the costs may outweigh the benefits.

"In many ways, going public is going to be one of the worst things that could happen to Google," said Danny Sullivan, editor of the Search Engine Watch newsletter.

Executives at the Mountain View, Calif., company are expected to make a decision soon because a provision of a 70-year-old federal law requires them to file papers detailing their business operations by Friday.

Under the Securities Exchange Act of 1934, companies with more than $10 million in assets and 500 shareholders must disclose financial results, business risks and other information about their operations. Google probably triggered that regulation during its 2003 fiscal year by distributing stock options - a staple of Silicon Valley compensation - to most of its more than 1,000 employees.

That means the tight-lipped company has until April 30 to submit a so-called Form 10, which requires as much disclosure as the S-1 that must be filed when a company registers for an IPO.

As long as Google is giving up that many secrets, many people figure, it might as well use the stock market to reward its employees and venture capital investors.

"VCs don't invest in something just to sit and watch it grow in the shadows," said John Fitzgibbon, analyst with IPO Desktop, an investment news Web site. "They invest in it; they want to cash out."

Google, which didn't respond to requests for comment, also could use the IPO proceeds to take on costly projects. That could come in handy as competition ratchets up from Yahoo Inc. and Microsoft Corp., two deep-pocketed rivals that are developing search technologies to gun for Google's users and advertisers.

Most tech start-ups have no choice but to go public - they need the cash to fund their expansions. But Google has been profitable for years, making money by licensing its search technology to other Web sites and raking in revenue from targeted ads placed beside search results. Analysts peg Google's annual profit at $150 million to $350 million on sales as high as $1 billion.

Google co-founders Larry Page and Sergey Brin, who run the company with Chief Executive Officer Eric Schmidt, have often said they're in no hurry to take their company public. They have preferred to keep their strategic plans - and finances - closely guarded.

Indeed, the quarter-to-quarter demands of Wall Street might be too much for a company such as Google, which made its mark by thinking big and embarking on ambitious long-term projects that sneak up on competitors.

Just because Google has to open its books doesn't mean it has to go public and have its stock traded on an exchange, "where it can be battered around by the vagaries of the market," said Tom Murphy, a Chicago lawyer who runs the securities group at McDermott, Will & Emery.

Consider Overture Services Inc., the Pasadena, Calif., company that pioneered targeted search ads. Sullivan, the search industry analyst, noted that Overture had cornered most of its market in late 2001. But it was constantly under pressure from analysts to perform, while Google could release features at its own pace. For example, Google tested its comparison-shopping service, Froogle, for nearly a year before moving it to the Google home page, a luxury stock-market investors likely wouldn't stand for.

Overture's stock swung wildly each time it won or lost a big deal, until it was acquired by Yahoo in 2003.

Another pitfall of successfully going public: defections by suddenly rich employees.

It certainly wouldn't be unprecedented for Google to stay closely held. Science Applications International Corp., a research and engineering company in San Diego, had $6.7 billion in sales and $351 million in profit last year. It files reports with the SEC quarterly, annually and when it takes an action material to its business. But the company remains private, its shares held only by its 43,000 employees.

Google

Created by: Larry Page and Sergey Brin, as a doctoral research project at Stanford University.

The name: Google's name is a play on the word googol, which is the number 1 followed by one hundred zeroes.

Searches per day: More than 200 million.

Peak traffic hours:Between 6 a.m. and noon PST, more than 2,000 search queries are answered per second.

Languages supported: 36.

Sources: Google Inc., hoovers.com

Los Angeles Times staff writer Alex Pham contributed to this report. The Times is a Tribune Publishing newspaper.

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