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Google's IPO

Leslie Walker
.com Columnist
Friday, April 30, 2004; 11:00 AM

Internet search engine leader Google Inc. filed its long-awaited IPO plans on Thursday, setting the stage for the company to make its stock market debut -- a move that could be months away. Leslie Walker was online to discuss the IPO's implications. She wrote on Thursday that Google Gold could turn out to be Fool's Gold, especially if trends revealed this week in two new reports on venture capital persist.

A transcript follows.

Editor's Note: Washingtonpost.com moderators retain editorial control over Live Online discussions and choose the most relevant questions for guests and hosts; guests and hosts can decline to answer questions.


washingtonpost.com: Leslie, thanks for joining us. What are the IPO's implications to the people who use its site? What advancements will all that investment bring?

Leslie Walker: Hello everyone. Opinion is divided on how the IPO will affect Google users--which, at the rate it's growing, could include just about everybody soon. Some worry that selling a chunk of itself to the public will stifle Google's free-wheeling culture of innovation. That seems inevitable, but not necessarily a bad thing considering the lengths to which Google is going to preserve its creative culture. The dual-classes of stock, for one thing, will allow company executives and other insiders to retain more voting power.

It's worth noting that co-founders Larry Page and Sergey Brin wrote in a cover letter to their SEC filing that "we will not shy way from high-risk, high-reward projects because of short-term earnings pressure." They pledged to continue letting employees spend 20 percent of the Google work time working on pet projects they believe will improve the service.

Specifically, the IPO filing says Google will use the proceeds for just about everything--research and development, sales and marketing, general administration, capital expenditures and purchasing other companies.


Washington, D.C.: How do you think the online stock auction will affect Google's public stock price?

Leslie Walker: Conventional wisdom says the online auction should push up the initial offering price, since more people will have access to those shares. It's the law of supply and demand. That, of course, should mean more money for the original investors, employees and current shareholders. But it also may mean less of a first-day "pop" on the trading price, since more of the early demand may get fulfilled at the offering price.

Given the intensity of Googlemania, though, that last statement is debatable. It's a tough call what will happen after public trading starts.


Chicago, IL: What are the odds of the little guy being able to get Google shares in the IPO and where do we go to bid on them?

Leslie Walker: Little guys will have a much better shot at getting Google IPO shares than IPO shares of other companies. That's a key feature of this auction. That said, the kinks are still being ironed out in how it will work. And the odds of anyone getting shares will be determined partly by the strength of demand--how many folks submit bids--and that remains to be seen.

As for where to bid, that, too, is still being worked out. The requirements outlined so far indicate that bidders must have a brokerage account with a participating underwriter. So far only two are named--Morgan Stanley and Credit Suisse First Boston. But many more financial institutions likely will be participating once the process kicks into gear. In my opinion, it would be premature for anyone to rush out and open an account with Morgan Stanley now, just because it's a lead underwriter.


Washington, D.C.: Hi. I'm very new to investing, but am enticed by the Google IPO, and was excited to hear about the Dutch Auction. However, the section of the Post's article referring to being a "qualified investor" scares me a bit. What steps would one need to go through with Morgan Stanley or CSFB to be able to bid on this IPO? Thanks!

washingtonpost.com: Google's 'Dutch Auction' Opens IPO to the Masses (April 30, 2004)

Leslie Walker: Don't be scared by the mumbo-jumbo in the prospectus. It says:

"Before you can submit a bid, you will be required to qualify by obtaining a unique bidder ID and by meeting an underwriter's account eligibility and suitability requirements. Your unique bidder ID will be issued electronically only after you have accessed an electronic form of this prospectus, including the transcript of the presentation by our management team that will be contained in this prospectus, and only after you have provided identification information."

All that really means is you have to sign up online and get a bidding ID, and you will be required to click to prove you read or accessed the prospectus. They want to make sure you read all about the risks.

I talked to Morgan Stanley and CSFB and they are being inundated with calls, as you can imagine. CSFB doesn't even offer a standard retail investing business--it's for high net-worth individuals and institutional business. Morgan Stanley is a bit different, but it, like other financial institutions that will soon join the Google stock offering, isn't going to want people to open an account for the sole purpose of buying a few Google shares.


Arlington, Va.: I've read that Silicon Valley types believe this will completely revive the technology economy. Your thoughts?

Leslie Walker: I strongly disagree. The idea that Google's IPO could create a "big bang" effect and pump up Silicon Valley's economy in the way Netscape's did in 1995 is just silly. Back then, the commercial Internet was just being born. It's much older (though not wiser) now. Google is an incredibly mature and rich company, not an upstart like all those companies that launched the dot-com boom.


Washington, DC: Any sense when they will make the offering?

Leslie Walker: The timing of the offering is not predictable yet. The IPO papers filed yesterday kick off a 60-day period in which the Securities and Exchange Commission will comment on the registration before certifying it. Expect a lot of feedback and comments from the SEC, for this is a most unusual IPO.

Moreover, participating investment houses and Google are still working to develop the software that will run this complicated online auction.


VA: Is Google like a dot.com or like AOL?

Leslie Walker: Google bears little resemblance to AOL, which rose to fame selling Internet access.

Google is more of a dot.com. It's the quintessential new-media company in my opinion--a cross between the media business (advertising) and a software company (its search engine.)

While it rose to prominence as a Web search service, I expect Google will wind up helping us search for stuff offline, too, making it increasingly a rival to software king Microsoft. Its Gmail, the new email service, suggests it has ambitious expansionary plans.


Bowie: I know someone who worked for Google recently. It sounded to me a lot like Apple -- innovative guys (not too many women) with good ideas, except that you can't manage a large company as if it's still a small one.

NOTE: Apple has finally figured out how to act like a successful big company.

Leslie Walker: Good comment. I agree with the Apple comparison, and have been incredibly impressed with Apple's comeback.


San Francisco, Calif.: What about Gmail -- do you consider it a privacy invasion?

Also, will Google likely add more services like e-mail after it goes public and has to compete more directly with MSN and Yahoo?

Leslie Walker: I have been testing Gmail. I am ambivalent on the privacy question and plan to write more about it. But I love the fact that Google has come up with a genuinely innovative email service. When's the last time we saw something so experimental from Microsoft or AOL?

And yes, Google almost surely will add more services like email as it girds for battle with MSN and Yahoo. It identified Microsoft and Yahoo as its key competitors in the IPO filing. Personalization and localization of search results are the next frontiers for all three.


Washington, D.C.: Where on-line do you sign up and get a bidders ID? Thanks!

Leslie Walker: There is no online registration available yet. The first step for bidding is getting your hands on the IPO prospectus and reading it. That's a requirement:

Specifically, Google's announcement said Morgan Stanley and Credit Suisse First Boston will act as "joint book-running managers" for the auction, but that doesn't mean they will be the only companies offering shares to customers, just managing the auction.

Google provided toll-free phone numbers for follow-up questions, one at Morgan Stanley and the other at Credit Suisse.

Specifically, it said:

A copy of the prospectus relating to these securities may be obtained, when available, from: Morgan Stanley & Co. Incorporated , Prospectus Department, 1585 Broadway, New York, NY 10036 (tel: 1-800-364-5990) or Credit Suisse First Boston LLC, Prospectus Department, One Madison Avenue, New York, NY 10010 (tel: 212-325-1075).


Jacksonville, FL: Given your previous comment that CSFB doesn't offer retail accounts and Morgan Stanley isn't inclined to open accounts just so I can buy a few shares of Google, how exactly will this offering be more favorable to the small investor? Doesn't the choice of lead brokerage firms simply perpetuate the "IPOs are for the big boys" opinion?

Leslie Walker: Maybe I didn't make clear that these two are just leading the auction. Other big brokerages likely will be joining soon.


Washington, D.C.: If Google is so good and the owners don't want to share ownership rights, why didn't they finance through debt?

This IPO is just a different type of shareholder abuse. Googlers would like us believe that Wall Street was solely responsible for the late 90's bubble. So Google is refusing to permit shareholders and their representatives to question management or even to vote in power equal to their investment.

While many dot-coms were scams of intent or incompetence, today the Googlers are seeking to capitalize on the hype of antipathy toward Wall Street. Unfortunately, it is again the shareholders who aren't insiders that will bear all the risk and also be the last to know when things have gone wrong.

Leslie Walker: I agree there are two sides to this story. It's worth noting that this unusual auction is likely to enrich Google's founders and original investors more than the traditional IPO method would, because that typically results in a lower initial offering price by artificially restricting supply.

But I'm not convinced dual-class shares are a bad deal for regular shareholders. Big media companies like The Washington Post, New York Times and others have long used this tactic to retain greater control, particularly since their editorial mission might be compromised by too much sensitivity to Wall St.

I'm glad to see Google's self-image includes a high-minded sense of public mission like great media companies tend to have. Read the letter from its founders. They say things like, "Our goal is to develop services that improve the lives of as many people as possible--to do things that matter." They talk about retaining the purity of search results from undue influence by advertising. Refreshing talk for an IPO filing, no?


Newark, N.J.: Will this be another Akamai - another instance in which the IPO price will skyrocket, only to be pummelled by the market in short order?

Leslie Walker: Far be it for me to predict any stock price. I will say only that Google faces enormous long-term risks, and that the auction method also creates unusual short-term risks. This is no sure thing.


Washington, D.C.: Do you think Google's potential is as great as eBay and Yahoo's?

Leslie Walker: This is a tough question. In a nutshell, I think Google's potential could rival Yahoo's. I don't think you can make fair comparisons with eBay, though.

Why not? Because eBay is a marketplace and as such, it enjoys so-called network effects once it reaches critical mass. And eBay already has critical mass, making it very, very difficult for any competitor to come in and steal its customers.

Not so with Google. The barriers to entering Google's business are much lower than they with eBay's. Moreover, better technology--should, say, anyone invent it in the oodles of research labs out there--could quickly do to Google what Google did to its rivals a mere four years ago.


Alexandria, Va.: I think it's crazy that google could be valued as much as General Motors -- $25 billion. It just reminds me of the dot-com boom madness. Yes, Google is a successful company with a real service to provide, but I don't believe it should be valued so highly.

Leslie Walker: Actually, I'm, not sure a $25 billion valuation for Google is unreasonable. One thing this company has in common with eBay is incredibly fat profit margins. Google reported $962 million of revenue last year. It showed operating income of $343 million and net income of $105 million. Revenue last year jumped 176 percent over 2002. First-quarter revenue this year is up again sharply, to $390 million.


Grand Rapids, Mich.: What companies have the best prospect of developing equal or better search engines than Google and when might this happen?

Leslie Walker: Dozens of contenders are out there, along with scores of experiments in research labs. But I haven't seen any that appear close to dethroning Google, or even have good prospects of doing so. I'm just saying it is theoretically possible.

Even if a company comes up with a great new search-relevancy formula, I doubt they would have an easy a time as Google did taking it to the masses. The business today is much tougher, scaling to handle a massive audience is rough and there is a lot more competition.

Back then, most Americans had never even used a search engine and barely knew what it was. Now, Google is a verb, right up there with Xeroxing.


Washington, D.C.: What editorial mission does Google have to justify a dual classification system that dilutes an investor's dollar to 10% of a founder's dollar?

If they don't want to share ownership and are such a good investment, why not finance through bonds that have simply a legal right to repayment with interest?

Leslie Walker: Google's editorial mission of Google is to help people find information they are looking for--relevant information of all kinds. I don't have a strong opinion about how they should structure their IPO. I am merely saying that I agree they have a very important editorial mission that is little understood. And its significance will only expand over time.

The idea that Web search engines could ultimately be controlled by advertisers is not comforting to me. I am a strong advocate of maintaining the editorial/advertising division in Web search that has traditionally prevailed in my own business, newspapers.


Chicago, IL.: Leslie, Are you biased for Google? Are you part of the hype? You are sounding like an advocate.

Leslie Walker: Fair question. No, I don't consider myself biased for Google. If anything, I would caution investors not to rush into this auction thinking they will make money on Google stock. It's a shaky, risky business.

I actually believe we in the media have hyped Google to ridiculous levels. It isn't magical. I hope we continue to have lots of choices among Web search engines-- and that Google doesn't wind up monopolizing the business, as Microsoft did with desktop software.


Wheaton, Md.: I agree that the IPO hype, and the added hype of trying to include the little guy, will probably result in a ridiculous, relative to the company's fundamentals, share valuation. I hope not too many individual investors get caught up in this. These people cannot buy and sell stocks with the alacrity of the pros, and might end up losing money once the share price normalizes. Any thoughts?

Leslie Walker: Yes, you point out a big danger--that Googlemania could artificially inflate the initial offering price, causing a lot of "little guys" who thought they were getting a deal to get badly burned.


San Francisco, Calif.: With all the search engines on the Web, how is it that Google became such a big deal?

Leslie Walker: Fair question. I see two reasons. People tend to understand the first but not the second, which arguably is more important to Google's future prospects.

First, founders Brin and Page devised complex mathematical formulas that yielded more relevant search results than the first crops of Web search engines did. However, the "link analysis" that was their secret sauce--analyzing how Web sites cross link to one another--has since been widely mimicked. Many folks think Yahoo's own search engine is now as smart as Google.

Second, Google adopted a smart advertising system a few years ago. It matches text ads with relevant search results. This brings in almost all of Google's money. Yahoo bought a rival matching-ad technology, a company called Overture. These types of ads now account for the more revenue than any other type of Internet advertising.


Leslie Walker: That's all we have time for today, folks. Thanks to everyone who sent in questions. Sorry I couldn't get to them all. Maybe we'll do a repeat when Google releases more details of its IPO auction.


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