Google IPO Filing Leaves Out a Lot
Google Inc. had been such a secretive company that when it registered last week for an initial public offering, the crush of people trying to read the filing nearly crashed the Securities and Exchange Commission’s website.
Googlephiles found plenty of tantalizing nuggets in the hefty document -- the company’s financial results, salaries of its top executives and the fact that it will lose the exclusive license to its search technology in 2011.
But the IPO filing left some Google watchers wanting more. To them, the prospectus was almost as noteworthy for what was left out as for what was put in.
Computer makers report how many PCs they’ve shipped each quarter and automakers say how many cars they sell. But Google didn’t disclose how many people use its search engine, how many queries it powers, how often people click on its advertisements or how quickly its traffic is growing.
Some of the omissions were standard. The Mountain View, Calif., company said it planned to raise as much as $2.7 billion by selling stock to the public but left unanswered the question of how many shares it would sell and how much they would cost. Those details probably will be updated as the offering’s opening bell draws near.
Also absent were details about the nuts and bolts of how Google’s technology works. Wall Streeters would have flipped if Google had divulged the recipe to its secret sauce -- the mathematical algorithms it uses to return search results.
“As a public company, we will of course provide you with all information required by law, and we will also do our best to explain our actions,” co-founders Larry Page and Sergey Brin wrote in a letter to prospective shareholders enclosed in the filing. “But we will not unnecessarily disclose all of our strengths, strategies and intentions.”
But some techies were hoping Google would at least give some more hints about how its technology works.
“How many [computers] do you have?” asked Andy Beal, a vice president for WebSourced Inc., an Internet marketing company based in Morrisville, N.C. “What does it take to power the most-used search engine in the world?”
Many analysts believe Google has linked more than 100,000 server computers to create one of the world’s largest supercomputers. But Google has said only that it uses more than 10,000 servers, and the filing was silent on the matter.
Other omissions were more troubling. Although Brin and Page took great pains to assure investors that Google’s “Don’t be evil” credo would continue to guide their decisions after the IPO, they didn’t disclose some information that could reveal conflicts of interest.
At the top of that list is the identity of Google’s largest advertising partners.
Google has financial incentive to steer Web searchers to sites that display ads placed by the company because that would boost its chances of collecting revenue, said Danny Sullivan, editor of Search Engine Watch, an industry newsletter.
“When you’re saying, ‘We’re pure and innocent,’ I think you have to back that up with who your major revenue partners are so we can decide that for ourselves,” Sullivan said.
In their letter, Page and Brin said Google didn’t let business relationships influence its search results.
“Our search results are the best we know how to produce,” they wrote in their “Owner’s Manual for Google’s Shareholders.” “They are unbiased and objective, and we do not accept payment for them.”
In the section outlining risks to its business, Google described several lawsuits it faces, including a patent infringement suit by Yahoo Inc. unit Overture Services Inc. and a series of actions stemming from ads Google sells that are tied to searches on trademarked names.
Google’s filing omitted one high-profile case involving Digital Envoy Inc., which developed a way to target ads at Web surfers based on geography. The Norcross, Ga.-based company sued Google in March for misusing its technology and asked a federal judge in Atlanta to block Google from using it. Digital Envoy is also seeking a cut of Google’s profits.
“Not disclosing it makes no sense to me,” said Timothy Kratz, Digital Envoy’s lawyer. “It will compound their problem when we turn out to be right about our claim.”
John Giovannone, an Orange County securities lawyer with McDermott, Will & Emery, said companies seeking an IPO must disclose all “material” information. If Google left out the Digital Envoy lawsuit, he said, its lawyers must have decided that the suit had little chance of resulting in an injunction against Google or a big verdict that could lead to a hefty payout. If the lawyers turn out to be wrong, Google shareholders could one day sue the company for failing to properly warn them.
“To a certain extent, your S-1 prospectus is your insurance policy,” Giovannone said. “If you’ve disclosed it, you’ve disclosed it. If you don’t, it could come back and bite you.”
