For Google, Going Public Is Far From a No-Brainer
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 to make acquisitions.
It can also 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 of 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 Friday 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 website. “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 websites 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 Eric Schmidt, have often said they’re in no hurry to take the company public. They have preferred to keep their strategic plans -- and Google’s finances -- closely guarded.
Indeed, the quarter-to-quarter demands of Wall Street might be too much for a company like 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 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 probably 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.
“If you start making a whole bunch of Google millionaires,” Sullivan asked, “what’s keeping the millionaires on the farm?”
Microsoft once struggled with the same decision. In the mid-1980s, the Redmond, Wash., company was the second-largest software concern behind Lotus Development Corp. Its executives knew the shares and stock options they had handed out to lure new employees would soon trigger the SEC regulation, forcing them to subject their finances to public scrutiny.
But founder Bill Gates, now the richest man in the world thanks to his Microsoft stock holdings, wasn’t sure he wanted to do an IPO.
“The whole process looked like a pain, and an ongoing pain once you’re public,” Gates told Fortune magazine in July 1986. “People get confused because the stock price doesn’t reflect your financial performance. And to have a stock trader call up the chief executive and ask him questions is uneconomic -- the ball bearings shouldn’t be asking the driver about the grease.”
After much discussion, including winning assurances from important employees that they wouldn’t take the money and run after the IPO, Gates agreed to go public. Microsoft’s shares hit the market on March 13, 1986, and raised $61 million in a single day.
On the other hand, it 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 and whenever it takes an action material to its business. But the company remains private, its shares held only by its 43,000 employees.
SAIC workers can trade shares among themselves four times a year, in deals handled by an SEC-registered broker.
“We don’t find ourselves under pressure to meet short-term expectations that a typical public company might have dealing with Wall Street analysts,” said Chief Financial Officer Tom Darcy. “We have patient owners who are in it for the long term.”
There’s more riding on Google’s decision than its own corporate future: A Google IPO could open the door for other technology stock offerings.
“If Google is successful, it will help pull the sector forward,” said Don Williams, a partner with Ernst & Young’s venture capital consulting practice. “If Google has a poor experience, it will have a much larger ripple effect. It has the opportunity to pull the market in the direction it’s moving.”
The leader of one rival search-engine company said Google didn’t need to go public to keep up with the Internet heavyweights.
“Google can compete with anybody,” said Ask Jeeves Inc. Chief Executive Steve Berkowitz, whose Emeryville, Calif., company went public in 1999 at the height of the dot-com craze. “These are guys who have one of the best brands ever created in such a short time.”
When deciding whether to go public, he said, Google’s leaders must carefully weigh whether the prolonged speculation about an IPO is distracting Google’s employees. They must also decide if they want to broach new markets that require heavier investments than they can afford to fund internally.
“It all depends on what Google wants to be when it grows up,” Berkowitz said. But, he added, “there’s so much value in Google, it’s hard to think they’re not going to want to unlock some of that.”
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Times staff writer Alex Pham contributed to this report.
