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Google Plans IPO in Bid to Keep Market Standing
Washington Post Staff Writer
Saturday, October 25, 2003; Page E01
Google, the Internet search service so popular that its name has become a verb, is planning an initial public stock offering that would raise billions of dollars as it seeks to retain its dominant market position, according to investors and others familiar with its plans.
The company is planning a public offering in part because venture capital firms that were early investors are eager to realize a cash return on their stakes. In addition, Google Inc. wants money to take on competitive threats posed by Microsoft Corp., which is developing a new search engine of its own, and Yahoo, which has bolstered its position as a leading online portal by strengthening its search function and diversifying the online services it offers.
Andy Bechtolsheim, one of Google's first investors, said in an interview yesterday that the profitable, privately held company now has so many shareholders, including about 1,000 employees with stock options, that it is required by law to publicly disclose its financial results by next spring. Forced to pull back the curtain on its performance no later than April, Google officials decided to cash in on their success by selling stock to investors, he said.
Bechtolsheim said fresh funds raised by Google probably would be used to invest in new technology -- the company already relies on sophisticated mathematical equations and thousands of computers to provide speedy, targeted online search results. He said it would also benefit by having Google stock available to use for targeted acquisitions.
Bechtolsheim met Google's founders, then Stanford University PhD students, five years ago and wrote them a check for $100,000 so they could afford to buy computers to demonstrate the power of their newly developed search methodology. The entrepreneurs not only had a clear vision for how to make the Internet more useful for computer users, but also had a successful business model in mind that emphasized nonintrusive, relevant ads, rather than the banner ads that Bechtolsheim said he found annoying when he went online.
"One reason I was so quick to write them a check was I asked, 'How are you going to make money?' They said, 'Once someone looks for something specific, we can show them ads that are relevant to them.' That was in the mind of the founders from Day One. They really invested in technology. They have over 100,000 computers doing this."
Google officials, who declined comment, have been meeting with Wall Street firms to discuss the offering. The Financial Times reported yesterday that those talks have included consideration of raising the funds through some type of electronic auction.
Google has rapidly transformed the way people use the Internet since it was launched in 1998 by Sergey Brin, a University of Maryland graduate born in Moscow, and Larry Page, who had worked as a software developer at Advanced Management Systems in Washington. In contrast to early search engines that provided hundreds of results for computer users to sort through without prioritizing them, Google uses secret, complex formulas and massive computer databases to provide a simple outcome: giving users fast access to relevant information.
The Google name is a play on the word googol, the mathematical term representing the number 1 followed by 100 zeros. The brand has spread globally despite little in the way of advertising or marketing expenditures. Just as people ask for a "Kleenex" when they want a tissue, computers users speak of "Googling" when they are looking up something on the Internet.
According to one recent study by ComScore Media Metrix, 76 percent of Internet searches use Google, with Microsoft's MSN scoring a distant second at 15 percent. Studies also show that computer users largely use the Internet for two things: targeted searches and communicating.
Matthew Berk, Jupiter Research's senior analyst, characterized the speed, reliability and quality of Internet search results using Google, based in Mountain View, Calif., as "magic." Yet the company also faces competition from more diversified competitors.
"Their competitor is Yahoo, and all the muscle Yahoo brings to bear not just on search but what sits next to search," Berk said. "Yahoo has a daily flow of people using e-mail addresses, building small businesses, doing searches and checking sports scores. Yahoo owns so much of that. . . . You raise a significant war chest so that competition becomes more manageable."
Google's plans to go public may challenge the culture of the firm, which is used to operating without the intrusiveness that comes with a broad base of shareholders, Berk said. Bechtolsheim expects continued growth at the company, which another expert said generates tens of millions of dollars in profits and is growing faster than 200 percent annually.
"They are very profitable, so they don't need to go public to raise cash," Bechtolsheim said. "I'm proud to be associated with the company. It is one of the few really useful consumer benefits, to find all the stuff you are looking for on the Net."