Updated from 5:42 p.m. EDTGoogle has finally filed to go public. Setting the stage for the most eagerly awaited initial public offering since the tech bubble burst, the Internet search-engine operator filed IPO documents Thursday at the Securities and Exchange Commission. Google will seek to raise $2.7 billion in a deal led by Morgan Stanley and Credit Suisse First Boston, according to its form S-1. As had been speculated, Google will take the unusual step of selling all of the shares through an auction-based process, rather than giving underwriters the lead role in deciding how much the company is worth. "We are working to create a sufficient supply of shares to meet investor demand at IPO time and after," Google said in a prospectus. "Buyers hoping to capture profits shortly after our Class A common stock begins trading may be disappointed." (To see the text of the company's letter to prospective shareholders,
The impending offering also promises to give Google a huge war chest for whatever type of expansion its management sees fit -- investments that could make major changes in the landscape now dominated by Yahoo! ( YHOO), Time Warner's ( TWX) America Online, Amazon.com ( AMZN) and others. The filing comes as some observers are starting to wonder if the hype about the company and its closely watched sector is taking on a life of its own. But for now, outsiders finally know how much money Google is making, after years of rumor and conjecture. Google makes its money primarily by selling advertisements that run alongside its search engine. Advertisers bid on the amount they're willing to pay to have their ads linked to specific terms; for example, an online shoe store might bid to have its ad run anytime someone types in "shoes" on Google's search engine, and the amount of the bid would affect how prominently and how often the ad appears. Google also runs contextually targeted ads unrelated to search, so that same hypothetical shoe store's ads might run, in an online news site, on the same page as a story about the latest fashions from Manolo Blahnik. Either way, advertisers pay Google only for each time Internet users click on their ads to visit their sites. That's the primary approach taken by Overture Services -- the company, acquired by Yahoo! last fall, which is Google's biggest rival in pay-per-click search-engine advertising. To put Google's results in comparison, in April of last year, Overture management forecast it would have 2003 revenue of more than $1 billion, earnings before interest, taxes, depreciation and amortization around $100 million, and net income of about $24 million. Outsider estimates of Google's market capitalization following an IPO fall generally in the range of $20 billion to $25 billion. Yahoo!'s market capitalization is $38 billion; at the time that Yahoo! completed its cash-and-stock purchase of Overture last fall, Overture was effectively valued at $1.8 billion.
A key difference between Google and Overture, before it was acquired by Yahoo!, was that Overture supplied only its search-engine results to other companies; it wasn't a destination site for Internet users to start searching. Google, in contrast, had the fourth-largest audience among U.S. Internet users in March, according to Nielsen//NetRatings, behind only Microsoft ( MSFT), Time Warner and Yahoo!. Though fewer people do Internet searches via Google than via Yahoo!, more searches are conducted on Google, according to comScore Networks. Of the approximately 3.5 billion Internet searches that U.S. Internet users conducted in February, 35% took place on Google, compared with 30% at Yahoo!, according to comScore. (Tied for third place, at 15% apiece, were Microsoft and Time Warner.) In February 2003 -- the last month, according to comScore, that Yahoo! had a greater share of U.S. searches than Google -- Google had 27% of the nearly 3.4 billion searches conducted, while Yahoo! had 31%. Search-engine advertising -- which was the Internet's success story even as the Internet ad market deflated following the dot-com bubble -- is expected to continue its healthy growth, though forecasts vary. In March 2003, Piper Jaffray predicted the worldwide search market would go from $1.4 billion in 2002 to $7 billion in 2007. In November, Pacific Crest Securities forecast that worldwide search-engine advertising would grow 40% annually, from $2.1 billion in 2003 to $7.8 billion in 2007. Overture told analysts a year ago that annual sales of Internet-search and related services, including contextual advertising, could grow to as much as $15 billion worldwide by 2008. However fast search-engine advertising is growing, it's growing faster than people have expected. In the first quarter ended March 31, Yahoo! shocked analysts with its revenue growth; on an organic basis, advertising revenue grew 48% year over year in the first quarter, thanks to both search advertising and traditional, branded online advertising.