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Google Files for IPO, Vows It Won't Change

Google ended months of speculation yesterday by filing with the Securities and Exchange Commission for a $2.7 billion initial public offering that defiantly promised to keep the search giant's quirky ways.

The filing revealed Google as a highly profitable and flush company. In 2003, it recorded a $105.6 million profit on $961.9 million in sales. In the first quarter of 2004, it earned $64 million on revenue of $389.6 million. The company has $454.9 million in cash and cash equivalents on its balance sheet.

The filing, triggered by an SEC provision that a company with more than 1,000 employees and 500 shareholders file financial information, sets in motion Google's path to public ownership and all the benefits and perils it may bring.

Though it likely will be the most sought-after offering of the year, the IPO could pose a challenge to Google's freewheeling culture. The filing's timing, on the last possible day before violating SEC rules, betrayed Google's ambivalence to taking the step.

In an unusual letter accompanying the filing, Google founders Larry Page and Sergey Brin vowed the company would continue to operate in its own offbeat manner and that it hoped to make the world a better place.

“Sergey and I founded Google because we believed we could provide a great service to the world — instantly delivering relevant information on any topic. Serving our end users is at the heart of what we do and remains our number one priority,” Page wrote. “Our goal is to develop services that improve the lives of as many people as possible — to do things that matter.”

The founders signaled their intent to keep control of the company by creating a dual voting structure that will leave Brin, Page and CEO Eric Schmidt able to control decision making. Google noted the structure, while unusual for tech companies, is more common at media companies like The New York Times.

“It's very reminiscent of the media moguls and Rupert Murdoch in terms of corporate governance,” said Niki Scevak, an analyst with Jupiter Research.

The stock offering would give Google ample new resources to fight Yahoo and Microsoft for supremacy in the search business. According to comScore, Google controls 35 percent of the market to 30 percent for Yahoo and 15 percent for MSN.

Nearly all of Google's revenue (96 percent) comes from selling keyword-based advertising through its AdWords and AdSense programs. International operations accounted for 26 percent of revenue last year and 30 percent so far this year.

“It demonstrates the powerhouse they are throughout the world,” Scevak said.

Google's filing also revealed the mix of its business from its own sites and its partners. Google's Web sites accounted for 80 percent of revenue last year and 75 percent this year. The rest came from ad listings on the search sites of Ask Jeeves and AOL, in addition to its AdSense partners.

Google said most of its revenue growth was driven by higher click volume, not higher click rates.

Some have speculated that as a publicly traded company beholden to shareholder interests, Google will be forced to risk its good standing with consumers. Its famed “Don't be evil” motto could come under pressure as the company is forced to meet Wall Street expectations each quarter. For example, Google recently said it would not let businesses pay to be included in its search index as rival Yahoo does.

“We believe strongly that in the long term, we will be better served — as shareholders and in all other ways — by a company that does good things for the world even if we forgo some short-term gains,” Brin and Page wrote. “This is an important aspect of our culture and is broadly shared within the company.”

Along these lines, Google said it does not intend to give earnings guidance and warned investors that it would happily sacrifice financial results for business growth. Its founders also said it would keep its unusual three-person executive arrangement, with Schmidt making decisions jointly with Brin and Page.

“This structure is unconventional, but we have worked successfully this way,” the founders wrote.

As a public company, Google could be forced to change its notorious corporate secrecy. Google has jealously guarded details of its business, both large and small. The company has been vague on its number of employees, for example, saying it has “over 1,000” (the filing puts the figure at 1,907).

Brin and Page vowed Google would not go much beyond what is required when it comes to its business information.

“We will not unnecessarily disclose all of our strengths, strategies and intentions,” the founders wrote.

Matt Naeger, vice president of Pittsburgh-based search marketing firm Impaqt, said a publicly traded Google might become less secretive. In November, search marketers were startled when Google changed its search algorithm without notice, just before the all-important holiday shopping season, in what became known as the Florida Update.

“I think it would be handled completely different [as a public company],” he said.

Google did not state how many shares it plans to offer or at what price. Google's stock offering, underwritten by Credit Suisse First Boston and Morgan Stanley, plans the unusual step of offering its shares through an auction in order to give more people a chance at investing in the company. Brin and Page said Google's experience operating an auction environment for its search advertising persuaded it to use this system as the fairest way to distribute ownership.

In its opening and conclusion, the Google founders' letter states: “Google is not a conventional company.”

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