Google files for unusual $2.7 billion IPO

The Internet search king files documents with regulators that provide an insight into its business, as it prepares to sell shares to the public.

Stefanie Olsen Staff writer, CNET News
Stefanie Olsen covers technology and science.
Stefanie Olsen
8 min read
Internet search leader Google filed to go public on Thursday, seeking to raise $2.7 billion in an unusual auction-style offering that will give the founders rare control over the company.

The registration filing with the Securities and Exchange Commission offers an estimate of what the company believes it may be able to raise with its initial public offering, but it does not disclose the number of shares that will be offered, nor the range in price for those shares.


What's new:
Google, the leading Internet search engine, is seeking to raise $2.7 billion in an initial public offering.

Bottom line:
Google's IPO has been long anticipated. Not only does the filing shed light on the inner workings of the secretive and successful company, but it also represents the latest in a string of tech IPOs after three lean years in Silicon Valley.

More stories on this topic

As a result, the potential market value of the company will not be available until the company files an amendment to its IPO that lists those figures.

In an unusual provision for a technology company, Google will create two classes of shares with different voting rights, a move that aims to guarantee that founders Sergey Brin and Larry Page will maintain decision-making authority. Such structures have proved beneficial in media companies such as The New York Times, the filing states.

With the filing, Google for the first time released its financial results, answering long-awaited questions about the company's profitability. The company generated $961.9 million in revenue in fiscal 2003 and posted $105.6 million in net profit. That marked the third consecutive year of profits for the Web's most popular search engine. During the most recent quarter, which ended March 31, Google collected $389.6 million in revenue and posted a $64 million profit.

Excluding provisions for charges including stock-based compensation and taxes, Google's performance is even better, with an operating profit margin of 62 percent, or $571.8 million, for 2003.

As of March 31, Google employed 1,907 employees, more than sixfold the number three years ago.

Download the S-1
Google's registration

Click here to download
Google's S-1 filing.
Caution: Large file.

The filing caps months of speculation about a deal that many expect could signal a resurgence of Silicon Valley, after three lean years.

In a flourish befitting the company's offbeat reputation, founders Brin and Page included a letter to investors, which they dubbed an "Owner's Manual for Shareholders." The letter outlines the company's goals, warning investors that Google as a public company will not follow the usual path.

"As a private company, we have concentrated on the long term, and this has served us well. As a public company, we will do the same," the letter states.

"In our opinion, outside pressures too often tempt companies to sacrifice long-term opportunities to meet quarterly market expectations. Sometimes, this pressure has caused companies to manipulate financial results in order to 'make their quarter.' In Warren Buffett's words, 'We won't smooth quarterly or annual results: If earnings figures are lumpy when they reach headquarters, they will be lumpy when they reach you.'"

The founders historically have fought to maintain their control over the company, even as it hired Chief Executive Eric Schmidt in 2000. According to the document, Brin and Page said they will run the company as a "triumvirate."

Another flourish involves the company's allegiance to its geeky roots: The amount of the $2.7 billion offering contains an inside joke for the math-minded. The exact offering, $2,718,281,828, is the product of "e" and $1 billion, where "e" is the base of the natural logarithm--a logarithm especially useful in calculus--and equals about 2.718281828.

Google is sitting on a sizable war chest of $454.9 million in cash and cash equivalents, according to the SEC filing.

That may bode well for the company, as it continues to duke it out with Yahoo and a number of other competitors now getting into the market, including Microsoft.

Complete coverage
Google's IPO
The Web search king
plans to raise
$2.7 billion.

Although Google named two investment bankers in its filing, the IPO process itself will be auction-based.

"It is important to us to have a fair process for our IPO that is inclusive of both small and large investors. It is also crucial that we achieve a good outcome for Google and its current shareholders," the filing states.

"This has led us to pursue an auction-based IPO for our entire offering. Our goal is to have a share price that reflects a fair market valuation of Google and that moves rationally, based on changes in our business and the stock market."

In their letter to investors, Brin and Page said they plan to sell some of their shares as part of the offering and are encouraging other shareholders to do so as well.

Shares in the company held by executives and top investors as of March 31 were: Page, 38.6 million; Brin, 38.5 million; John Doerr, 24 million; Michael Moritz, 24 million; Sequoia Capital, 23.9 million; Kleiner Perkins Caufield & Byers, 23.9 million; and Schmidt, 14.8 million.

Also disclosed in Thursday's filings are previously confidential salaries of top executives.

Brin, president of technology, is paid $150,000 annually with a bonus of $206,000; and Page, president of products, receives the same amount. Omid Kordestani, senior vice president of worldwide sales, makes $175,000 annually, with nearly $400,000 in bonuses. Wayne Rosing, vice president of engineering, is paid $175,000 annually, with $150,000 extra.

Schmidt is paid $250,000 annually with a bonus of $300,000. He has the right to purchase 14.3 million common shares at a purchase price of 30 cents and another 426,000 preferred shares at $2.34.

Bring on the challengers
Google's IPO announcement comes when the company is at the top of its game, having come out of nowhere to trounce one-time search leader Yahoo with a simple, stripped-down service that beat nearly everyone in delivering relevant search results. Google had an audience of 60 million unique visitors, or 40 percent of all U.S. Internet users, in February, according to Web measurement company ComScore Networks. Its audience has grown by nearly 25 percent since February 2003.

Search engines are a hot commodity, because they've shown that they can make money through pay-per-click advertising programs, such as those pioneered by Yahoo subsidiary Overture Services. Search engine advertising is one of the fastest-growing segments of the rebounding Internet marketing sector. It helped Yahoo's earnings grow 84 percent last year.

Yahoo alone has invested more than $2 billion in search during the past 18 months, and Microsoft is also spending money on the technology.

According to the document, Google generates 95 percent of its revenue from advertising, which it shares with distribution partners, such as America Online, that use its search index. Advertisers buy keywords that launch tiny text ads alongside search results each time someone types those words into Google's search box and clicks "Google Search." Advertisers pay the amount they bid for the terms, but only if someone clicks their ads.

Although Google has built a powerful brand, its competitors are gearing up for a drawn-out battle for control of the lucrative Web search business.

Yahoo alone has invested more than $2 billion in search technology in the last 18 months. It has bought former search highflier Inktomi, commercial search pioneer Overture Services and Kelkoo. Earlier this year, after months of speculation, Yahoo declared war, dumping Google for its own technology. Now, the two companies are in a neck-and-neck race to bring more data and useful shortcuts to Web surfers so that they can easily find what they're looking for.

Microsoft, too, has taken aim at search. It has invested half a billion dollars in research and development in Web search and information retrieval via the operating system. Although it has yet to unveil a working search tool of its own, currently licensing technology from Yahoo, the company said it aims to vastly improve Web search later this year, when it will launch a first version of the technology.

"It's a good time for them to go public. Google has to fight for the hearts of consumers and pocketbooks of consumers," said Charlene Li, an analyst at Forrester Research.

As competitors gird for the search battle, Google is setting its sights on new horizons that could expand its empire into new territories.

In the last three years, it has unveiled search for news, discussion groups, shopping, local services and enterprises, and it has bought into Web publishing, with its acquisition of Blogger. It's also experimented with tools for personalization, grid computing and searching on mobile phones. What's more, it aims to unveil public services for social networking, free Web-based e-mail and desktop search.

Those steps have led some to speculate that Google wants to remake itself as a Web portal akin to Yahoo, although Google executives have steadfastly denied that.

Others have suggested that the massive battery of networked computers Google uses to serve up search results in fractions of a second could support any number of novel applications.

Google's director of technology, Craig Silverstein, employee No. 1 after Brin and Page, said the company fields more than 200 million queries a day with the use of more than 10,000 servers, which run on the open-source operating system Linux. To deliver search results, it mines more than 4 billion Web pages. But many people familiar with the company say it uses more than 100,000 servers to perform search queries, in what may be the largest grid of computers on the planet.

Whimsical leanings
Regardless of where the company winds up, it has already made its mark as a fearless defier of convention--a reputation the founders vowed to maintain, even after their IPO.

Today at the Googleplex, the company's headquarters, there's a college campus atmosphere, complete with lava lamps, brightly colored exercise balls and free food. (The former personal chef of Jerry Garcia cooks up breakfast, lunch and dinner to go.) Large bins of food, which contain cereal, M&Ms and PowerBars, inspire jokes among staff members about "the Google 15," referring to the weight workers risk gaining upon first joining the crew. Bikes and dogs are lying around cubicles, and people occasionally roll by on Segways.

Brin, 31, and Page, 32, launched Google in September 1998 in a friend's garage in Menlo Park, Calif., naming the company after the mathematical term "googol," which stands for a 1 followed by 100 zeros. The two raised $1 million in funding from angel investors, including $100,000 from Andy Bechtolsheim, one of the founders of Sun Microsystems, and they were egged on by Stanford University alum and Yahoo co-founder David Filo.

The founders met in 1995, when they were doctoral students in computer science at Stanford. Both were enthralled with information retrieval and artificial intelligence. The two collaborated in 1996 on a search engine called BackRub, Google's precursor, which gained notoriety on campus for its ability to analyze the "back links" pointing to a given Web site. The two were known for using careworn machinery to build up their computing power, and Page's dorm room became Google's first data center.

Linux vendor Red Hat was Google's first commercial search customer. Other early customers included Amazon.com, Netscape, Virgilio and Virgin.net. Yahoo, which at the time wrote off search as a commodity business with little profit potential, became Google's largest customer in 1999.

In June 1999, Google raised $25 million from Sequoia Capital and Kleiner Perkins--which has also invested in Sun, Amazon and Yahoo. In addition to Brin, Page and Schmidt, members of Google's board include Moritz of Sequoia; Doerr of Kleiner Perkins; and Ram Shriram, former president of Amazon's Junglee.

Google recently signed on three new board members, giving it nine directors. Joining the board were John Hennessy, president of Stanford; Art Levinson, CEO of Genentech; and Paul Otellini, president and chief operating officer of Intel.