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APRIL 30, 2004
By Ben Elgin Democracy and Control in Google's IPO Beyond the hype, this offering's success will hinge on how investors react to some uncommon provisions, like two classes of stock Putting an end to months of speculation, Google on Apr. 29 filed the paperwork necessary for launching an initial public offering. The documents shine a revealing spotlight on the secretive company's booming financials -- and showcases some surprising twists. It seems that the popular search engine's founders, Larry Page and Sergey Brin, want both a bit more democracy and a little more dictatorial control. In an unusual move, Google will be selling its shares to the public through an auction format conducted by lead underwriters Morgan Stanley and Credit Suisse First Boston. (No time frame has been set yet.) This will let some smaller investors get in on the action as well as big institutional players. At the same time, Google's founders envision retaining strong control, due to an unusual dual-class stock structure. The first-ever peek at Google's financials doesn't disappoint. Its $106 million in net profits in 2003 were below the best guesses of many Wall Street analysts. But its bottom line appears to be accelerating, with first-quarter 2004 profits rocketing 146%, to $64 million, vs. 2003's first quarter. At this pace, Google's 2004 net profits would top $250 million. Such numbers put Google on the heels of key competitor Yahoo! (YHOO ), which increased first-quarter net profits by 115%, to $101 million. Google's top line is equally strong, with $962 million in revenues last year, up 176% from 2002. OPEN FOR BIDS. This will be no by-the-numbers IPO, however. That becomes clear by the voluminous registration document's sixth page, where founders Page and Brin spell out their intentions in an "owner's manual" for Google shareholders. Not only do the founders vow to emphasize long-term business over short-term results but they also insist that Google will still be run as a "triumvirate" consisting of the co-founders and CEO Eric Schmidt. It's a highly unusual structure that some management experts believe could impede decisive action at the 1,900-person company (see BW Cover Story 5/3/04, "Google"). But the founders defend the practice, writing in the filing: "The shared judgments and extra energy from all three of us has significantly benefited Google." Perhaps the most unusual feature will be Google's full embrace of an auction to allocate shares. It's a sharp difference from typical public offerings, which see investment banks sell shares directly to big institutional investors. In Google's case, the lead underwriters will conduct an auction to set the IPO price and determine the allocation of shares, with individuals deemed suitable by the banks able to request shares directly. CLASS CONSCIOUSNESS. The potential upshots are twofold. First, this approach could level the playing field for small investors, who typically have a more difficult time participating in public offerings. Second, it could potentially set the IPO price closer to the true demand, limiting any pop in its stock price, and maximize returns for Google (see BW Online, 4/30/04, "Google This: Reality Check"). Some may be wary of this unconventional arrangement, however. "It's admirable that they want small investors involved," says Barry Randall, a portfolio manager with US Bancorp. But some investors, he adds, "tend to look unkindly on management that thinks they're above the process." Google's stock structure could further test investors' willingness to participate in this offering, which many on the Street believe could raise $2.7 billion on the strength of a relatively small percentage of total shares likely to be offered. The company is creating a dual-class stock structure, which leaves Page and Brin with tremendous control over Google. This is a hot-button issue in corporate governance, where some investors have been pushing companies for equal voting rights and a single class of stock. Corporate-governance experts estimate that just over 10% of publicly traded companies have such dual-class structures. CHURCH AND STATE. These arrangements are more common in the media industry, where companies often insist that the extra control will help preserve editorial integrity. Indeed, companies such as New York Times (NYT ) and Washington Post (WPO ) boast such dual-class structures. From its beginnings, Google has stuck to the notion that search is an editorial product, with a clear line between information and ads. The bet is that this stance will foster public trust in the brand and pay off with increased traffic. Even granting that Google is as much a media company as it is a tech company, some experts still worry that the dual-class structure could slightly diminish its valuation. "It flies in the face of the one-share, one-vote idea," says Kenneth Froewiss, professor of finance at New York University's Stern School of Business, who adds: "The [valuation] discount tends to be a couple of percentage points." That detail is unlikely to slow down this blockbuster offering, however. And after big investors have had a chance to digest the specifics, it's a sure bet they'll be lining up to participate.  Elgin is a correspondent in BusinessWeek's Silicon Valley bureau Edited by Douglas Harbrecht
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