Google Pulls Trigger On Long-Awaited IPO
The Mountain View, Calif.-based search engine powerhouse filed documents with the Securities and Exchange Commission for one of the most hyped IPOs in recent memory.
The documents revealed that Google earned close to a billion dollars ($961.8 million) in revenue in 2003, $932 million of which came from advertising revenues. The company seeks to raise $2.7 billion from the IPO, which is being lead by Morgan Stanley and Credit Suisse First Boston. As expected, Google will sell all of its shares through an auction-based process.
However, ongoing legal issues could put a damper on the party. In its SEC filing, Google revealed that it currently faces a lawsuit filed by Overture Services in 2002; Overture is now a Yahoo! company. Yahoo! and Google are key rivals. Google said it believes the lawsuit is without merit, but a loss in court would hinder the company's ability to deploy its AdWords program, which is a crucial source of ad revenue.
Trademark infringement suits also hover over the company, as well as growing skepticism from lawmakers and privacy groups over its pending Gmail email service. The service--now being tested--crawls consumers' email messages to serve contextually relevant advertising links in a sidebar next to messages.
Google's filing also included a letter to prospective shareholders with the following statement: "An auction is an unusual process for an IPO in the United States. Our experience with auction-based advertising systems has been surprisingly helpful in the auction design process for the IPO. As in the stock market, if people try to buy more stock than is available, the price will go up. And of course, the price will go down if there aren't enough buyers."
Google also said that it encouraged its existing shareholders to sell shares in conjunction with the offering to provide more supply for investors and to help ensure a stable share price.
Denise Garcia, principal analyst, GartnerG2, noted with interest the auction-based system that Google decided to implement for its IPO. "[Google sells] ads on a bid-based system, so it's interesting that they release their shares on a similar system." Garcia adds: "Essentially, they have transformed the online advertising process. This may creep into other media, and in effect, make the market more efficient."
Citing Google's 2003 net income of $105.6 million, Garcia said the figure was "amazing," considering that Google's net income in 2001 was $7 million. She said the interactive Yellow Pages industry should be particularly wary of Google's plans to corner the local search market as well.
"Its amazing that [Google] came in when the market was full--and was able to transform it and work with their competitors, and make them more successful too," Garcia added. According to the filing, Time Warner's America Online and AskJeeves accounted for 20 percent of Google's fiscal year revenue. Garcia said that number was surprisingly low, while Jupiter Research analyst Niki Scevak said the number was high.
Scevak also had a different reaction to the IPO filing. He said Google's letter to shareholders almost read like a "philosophical treatise on finance," alluding several times to the "arrogance" of its tone, which he said hearkened back to the late '90s egotism of other Internet startups.
Scevak further noted that Google's founders Larry Page and Sergey Brin will have a 10 to 1 share over minority holders, an equity structure that he said is "reminiscent to Vivendi Universal or News Corp." The voting structure will give the founders significant control over the company, and appears to be designed to prevent takeover bids.
Scevak was also surprised that 30 percent of Google's revenue comes from abroad. According to comScore qSearch, Google's market share overseas is even more dramatic than its domestic share, with the company accounting for more than 43 percent of all searches.
Nielsen//NetRatings ranks Google as the No. 1 search destination from home in nearly all of the countries the audience measurement firm tracks, with more than 107 million users worldwide. These countries include Australia, Brazil, France, Germany, Italy, the Netherlands, Spain, Sweden, Switzerland, the United Kingdom, and the United States.
Nielsen//NetRatings data shows that the Google brand was the fifth most visited brand on the Web in March 2004. This marks a 31 percent audience growth during the last six months, from nearly 50 million unique visitors in October 2003.
Other data from comScore's qSearch reveals that more than one billion of the 3 to 3.5 billion searches conducted by Americans each month are Google searches. The average Google user conducted 25 searches in February 2004, more than twice the average number of searches conducted by users of the top ten engines. Just over 65 million people visited its sites in March 2004, an increase of 23.5 percent versus March 2003. Further, Google controlled approximately 35 percent of searches conducted at major search engines by U.S. Internet users.
According to Jupiter's Scevak, the Google IPO is further evidence of a healthy keyword search market. JupiterResearch forecasts the market for paid listings to increase from $1.6 billion in 2003 to $4.3 billion in 2008. Despite aggressive spending on search, Jupiter says the level of monetization remains low, and organic results are more influential in driving e-commerce.
However, Jupiter notes that seven of ten search marketers plan to spend more on search this year. The percentage of search marketers buying greater than 100 keywords increased from 19 percent in 2003 to 56 percent in 2004. Currently, 89 percent of marketers allocate spending to Google, versus 77 percent for Yahoo!/Overture. Fifty-seven percent of search marketers said Google gave the best leads, compared to 31 percent who favored Yahoo!/Overture.
Also in the filing, Google revealed it earned $64 million on revenue of $389.6 million in the first quarter of 2004, a number Scevak noted to be "very, very impressive."