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Bidding Opens New Chapter for Tech 'God' Google

By David A. Vise
Washington Post Staff Writer
Friday, August 13, 2004; Page E01

Google Inc. plans to open the bidding in its highly anticipated public offering of stock at 9 a.m. today, kicking off an unconventional auction that will help it set an initial share price next week on its way to becoming a public company.

Investors were required to register with any of more than two dozen investment firms by early yesterday evening in order to tender their bids. Google is not saying exactly when it will close the bidding, and it is reserving the right to adjust the initial share price for trading after the auction has ended. The company currently estimates its initial stock to be worth between $108 and $135 a share.


The company's logo outside Mountain View, Calif., headquarters. (Erin Lubin -- Bloomberg News)

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Bidding Opens New Chapter for Tech 'God' Google (The Washington Post, Aug 13, 2004)
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Google's journey from a profitable and popular search engine to a company preparing to go public has transformed perceptions of the brand, knocking the firm from its status as an enigmatic Internet superstar to the ranks of real businesses with real problems requiring real-time disclosure.

The six-year-old company's gilt-edged image once was shaped by the positive experiences of millions of computer users, who found its easy-to-use search engine to be the best and fastest way to find information online. But after being scrutinized by the Securities and Exchange Commission, Wall Street, investors and the financial press, the company's aura of invincibility and omniscience has been shaken by the difficult transition to life in the public spotlight.

"A year ago, a New York Times article called Google 'God.' That was the height of Google craziness," said Danny Sullivan, editor of SearchEnginewatch.com, an online publication that tracks Google and its competitors closely. "Google is not God. They have been a smart, successful company but in the end, they are a company run by humans and they are fallible."

Many young companies that decide to go public endure some version of what Google has encountered on the road to an IPO. But in Google's case, much has been magnified by the its rapid rise to a billion-dollar enterprise.

With Google's unusually prominent presence in the daily lives of millions of computer users, media coverage has been intense, especially after its young founders declared that the firm would "Do No Evil" as it became more powerful and profitable. In effect, co-founders Sergey Brin and Larry Page made it clear that they regarded themselves and their company as the gold standard, setting the firm up for a letdown as the SEC process forced disclosure of various problems and risks.

"I don't think Google is any worse of a company than it was," said Andy Beal, vice president of KeywordRanking.com, an online marketing firm. "Now they have to let everybody know every little detail going on, and they have to do their dirty laundry in public."

As a bellwether for technology companies operating in a new era, Google has had to bear the added burden of serving as a symbol of the tech sector's survival after the crash of 2000. The company has disclosed that it remains a risky bet for investors since it cannot predict how its relatively new business model will hold up in the face of heightened competition and technological innovation.

While the founders would have preferred to keep the company private, Google had little choice but to embark on a path to public ownership. Part of the impetus came from SEC rules that required it to begin reporting financial results that it once had been allowed to keep out of the public eye, due to its large number of private shareholders. In addition, Google faced pressure from a pair of Silicon Valley venture capital firms that invested in the company early and wanted to cash in some holdings before geopolitical events such as terrorist attacks or a new technology market collapse wiped away their financial windfall.

Google's timing is hardly optimal, analysts said. It is attempting to go public at a time when numerous technology companies have postponed their offerings due to shaky market conditions. It has opted to sell initial shares in the middle of August while many investors are vacationing (and for the superstitious, opening the bidding on Friday the 13th no less). And its IPO follows a series of recent revelations that some analysts said may further dampen enthusiasm, including disclosures that the company is the target of several trademark and patent infringement lawsuits and its acknowledgement that it improperly distributed millions of shares of stock to consultants and employees.

The obstacles have not slowed Google. In recent days, the company settled a patent dispute with Yahoo Inc., paying its rival an estimated $328 million in Google shares and allowing Yahoo to sell part of that stock in the upcoming public offering. The online giant also held firm yesterday to a deadline for investors to sign up for its electronic auction, vaulting its unconventional $3 billion share offering forward into the bidding phase.

Google's desire for an auction to set the IPO price, rather than leaving that decision to its financial advisers, strained relations with Wall Street, which traditionally has enjoyed hefty fees and nearly absolute control over the allocation of shares in the IPO process to its biggest customers.

Google so far has insisted on conducting what it calls a more egalitarian electronic auction that holds down fees while making 25.7 million shares available to small investors familiar with the search engine, provided they bid high enough for its stock. While Google has won the big battle, it has had to make concessions; the company recently acknowledged that a few brokerage firms are refusing to hew to a request that investors be allowed to buy as few as five shares in the auction.

Analysts warn that while the masses may have embraced Google's free search service, the company's success for now depends on its ability to continue selling advertising. In recent months the company has tested new features, such as a free ad-supported e-mail service, in an attempt to broaden that financial base.

"The average investor will have a hard time separating the risks associated with the business and the feel-good factor of using Google as a search engine," Beal said. "It is one thing to have a great search engine that everybody loves using. The average investor may think that makes the whole company great. But that search engine is not what is making money for Google. It is advertising and what goes on behind it. Google is a risky stock, not only because of being a pioneer in a new industry but also because of limitations they have in the number of products that are generating revenue."

Scott Kessler, an analyst with Standard & Poor's Corp., said he has been disturbed by Google's recent disclosure of so many legal problems because it raises questions about the quality of its internal management systems and controls. That is of particular concern in Google's case, Kessler said, because the company has stated that it plans to disclose much less information about its inner workings and future plans than is typical for public companies.

One filing by the company disclosed that Google's general counsel, David Drummond, is under investigation by the SEC for his conduct at a previous employer. Drummond has denied wrongdoing and he continues to enjoy the strong support of Google's top management.

Google's failure to register more than 20 million shares of stock properly with federal regulators and more than a dozen states has made it the subject of investigations by a number of states, and raised the potential for costly litigation.

Google is also facing a growing number of trademark infringement lawsuits around the world, and the company has disclosed unresolved problems with the manipulation of its advertising system, a difficulty it refers to as "click fraud." Google charges for ads based on how many times people click on them, and the firm has seen instances where people have intentionally clicked on the ads of their rivals in order to run up their ad bills.

"What does all of this say about the internal controls the company had in place and has in place now?" Kessler asked. "It is no secret that Google has spent more time and resources to ensure controls were more substantial than before. To me, to see that these things were not fully understood and addressed, that to me is a little disconcerting, particularly when some of these things were happening less than two months ago."

The chatter about Google enters a new phase today, as the various investment firms handling the deal for Google begin to accept bids for its shares.

The company has estimated its shares to be worth more than 150 times its earnings per share in the past year, a lofty valuation that is comparable to that of Yahoo before its shares began a recent plunge. That estimate -- which would give Google stock market value in the tens of billions of dollars, ranking it ahead of General Motors Corp. -- came amid fawning press coverage and prior to the recent disclosure of regulatory violations and slowing revenue growth.

Google "had a fairy tale ride in the popular press," Sullivan said. "Ultimately, it will be left to the market to make the judgment."


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