• by Ross Fadner , November 26, 2003

Just how much is Google worth? The five-year-old company purportedly earns somewhere in the neighborhood of $800 million in revenues, and maybe $200 million in profits. But still, intangibles and analysts' predictions aside, the search giant is keeping its numbers to itself - for now.

The rumors of Google's Initial Public Offering are back, following their decision to approach several major investment banks for "exploratory discussions." This comes as a bit of a surprise, especially since the latest buzz over a possible IPO has led many to believe that Google would opt for an open auction to distribute shares.

This may still happen, according to Raffi Amit, professor of entrepreneurship and management at the Wharton School of the University of Pennsylvania. "What might be in the cards," he says, "is a sort of hybrid offering. Google could allocate some shares to the auction and offer some through the traditional investment banking route. That would put pressure on the investment banks not to discount too much, but at the same time provide assurances to the small investor that reputable firms are backing it." Amit claims that he's never seen a precedent for such a hybrid, but it would be an interesting model to consider.

But what about the rumors of a possible Microsoft takeover? So far, both parties have resisted such rumors, but you can be sure that if Microsoft can't buy 'em, they certainly won't be shy about trying to beat 'em. Remember Netscape? Well, according to Amit, "The question is whether Microsoft can do to Google what it did to Netscape-that is, with its marketing and technology power, develop an algorithm, add it to Internet Explorer, and crush Google."

Such a possibility is something investors will want to consider, but to Google's credit, to date they have resisted all incoming threats to their reign of search. Remember Teoma? No? Well, exactly.

Wharton professor Amit stresses that Google's incentive to go public is no different from any other company-namely, to become even bigger and establish liquidity among its investors. Amit notes that an IPO would be a means of giving investors a return, but it would also give them a greater means by which to compete with the likes of Yahoo! and Microsoft.

"Yahoo! and Microsoft's MSN are two big competitors," he says. "Both have deep pockets and a diversified range of businesses. They can invest in technology and marketing. As an independent company, Google must come up with a budget to compete effectively." It would seem that Google risks being swallowed up by the bigger fish who have the marketing and tech budgets to either devour them or run them out of the water if they do not act on going public.

So just how much is Google worth? Still, no one knows for sure, but the numbers being tossed around the press are between $10 billion and $25 billion, certainly enough to keep several industries buzzing with what is likely an impending decision. Of course, the question that begs to be asked in this day and age of more conservative investor e-valuation (er, pun intended) is: are these numbers inflated?

"Well," says adjunct Professor of Finance at Wharton, John Percival, "you might find that even if those cash flows are feasible for a little while, it's not sustainable-there's simply not enough demand for the product or service to justify it. And if there is, at some point someone's going to try to copy it at a lower cost."