Microsoft and Google: Partners or rivals?

Google recently began meeting with bankers to prepare for its initial public offering while it was still exploring a merger with Microsoft.

Nov. 7, 2003 8:00 a.m. PT

5 min read

Wall Street is not the only one wooing Google. Microsoft is as well.

Google, the high-flying Web search company, recently began holding meetings with bankers in preparation for its highly anticipated initial public offering. At the same time, it was still engaged in meetings of another kind: exploring a partnership or even a merger with Microsoft.

According to company executives and others briefed on the discussions, Microsoft--desperate to capture a slice of the popular and ad-generating search business--approached Google within the last two months to discuss options, including the possibility of a takeover.

While the overture appears to have gained little traction--Google indicated that it preferred the initial offering route, the executives said--it demonstrates the enormous importance that Google represents as both a competitive threat to Microsoft and as Silicon Valley's latest hope for a new financial boom.

Though seemingly spurned, Microsoft may still be interested in pursuing Google at a later date, according to an executive briefed on the discussions.



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Both Google and Microsoft executives refused to comment.

Google, which was founded by two Stanford computer science graduate students in 1998 and quickly became one of the most popular Web sites in the world, has in recent weeks become the subject of intense speculation since it indicated to Wall Street that it hoped to sell shares of itself to the public sometime in the first half of next year.

Memories of Netscape
Google's ability to stir Silicon Valley into a frenzy has also brought back memories here of Netscape, another start-up whose own IPO in 1995 helped touch off the dot-com explosion. Netscape once threatened Microsoft with a software browser that promised to be an alternative to its overwhelmingly dominant operating system.

Microsoft responded by significantly altering its business and adding its own browser as a free component of its Windows operating system, ultimately undercutting Netscape's business.

Google recently started wheedling down a long list of investment banks it approached earlier this month about underwriting the offering, which could be worth from $15 billion to $25 billion, the executives said. The company, which maintains tens of thousands of computers to help locate information on the Web almost instantly, has also explored the idea of a so-called Dutch auction, bypassing Wall Street and selling shares directly to investors. Such an approach could give it distance from scandal-plagued investment banking deals of the dot-com era, as well as create a huge base of small shareholders.

Auction route appeals
The auction route is said to appeal to Google's founders, Sergey Brin and Larry Page, who are known for their fascination in pursing technical solutions to many different kinds of problems.

But it appears that Google is more likely to take the traditional path of using Wall Street to sell its initial offering. It is still toying with the idea, executives said, of using an online auction for a possible secondary offering as a way to allow its millions of users to have a better opportunity to buy its shares.

The company is considering selling about a 10 percent to 15 percent stake to the public, which is expected to raise more than $2 billion to be used to invest in the business and generate wealth for its employees, venture capitalists and early investors. Among the banks still competing for the business are Goldman Sachs, Morgan Stanley, Credit Suisse First Boston, Citigroup, J. P. Morgan Chase and Thomas Weisel Partners, the executives said.

Morgan Stanley is viewed as the frontrunner, the executives said, though Google may choose two banks to lead the underwriting effort. Goldman Sachs is also viewed as a contender, the executives said, but Google's management has shown some concern about Goldman's close relationship with Microsoft and Yahoo, another major competitor.



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Google has a clearly dominant position in Internet searching, which has served as the foundation of a fast-growing and highly profitable ad business built around placing specific text ads close to Web queries on similar subjects.

Its rapid revenue growth, however, has begun attracting large competitors like Yahoo, which has acquired Overture, a leading search ad provider. While Microsoft and Amazon.com are both considering getting into the business, the growth in Google's Adwords keyword business has, at least for now, started to slow, according to a person with knowledge of the company's business.

Google's value
Microsoft as a search competitor could change the market's assessment of Google's value. Moreover, if Microsoft attempts to integrate Web search features directly into its coming Longhorn operating system, it could restart the bitter feud that led to the government antitrust case that grew out of Netscape's failure.

Partly in response, Google continues to explore new businesses to extend its reach into new markets and to find new sources of revenue. One such effort included approaching Friendster, a Silicon Valley social networking company that has recently grown rapidly, according to an executive briefed on the talks. Friendster has instead received a $13 million investment from a group of venture capitalists led by Kleiner Perkins and Benchmark Capital, an action that was first disclosed in The Wall Street Journal.

In Silicon Valley, executives and venture capitalists remain divided over the consequence of Google going public. Several people close to the two venture capital firms that are the major Google investors--Sequoia Capital and Kleiner Perkins Caufield & Byers--said that partners at the firms had been focusing closely on the timing of the Google offering, hoping to help jump-start a rebirth of the technology market of the 1990s.

But many other venture capitalists here say that Google is such a unique company that its offering, if and when it comes, is not likely to set off a similar train of events.

"There was a time we were all looking forward to Google," one venture capitalist said Thursday. "But it's become such an unbelievable event that it is a juggernaut. I no longer believe that it will open up the IPO market broadly."