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Can Google Be Public and Private?

By Keith Regan
May 7, 2004 5:09 AM PT

For all that Google has done to revive interest in technology and IPOs in recent weeks, it also has provided new fodder for a long-running debate: Is going public the ultimate goal for all companies, or are some businesses better served by staying private?

Can Google Be Public <i>and</i> Private?

Although the company is letting its IPO filing with the U.S. Securities and Exchange Commission (SEC) do the talking right now, the document leaves little doubt about Google's position: It is confident it can strike the perfect balance and become a public company without giving up the benefits of being privately held.

Google's founders say they will remain focused on the long term, eschewing the earnings expectations game, avoiding opportunities to book quarterly gains at the expense of long-term corporate health, continuing to make strategic and even zany investments, and striving to nurture a unique but fragile corporate culture that values employees and their ideas. In a nutshell, they say, the firm will keep trying to make "the world a better place" by "doing good things."

"If opportunities arise that might cause us to sacrifice short term results but are in the long term interest of our shareholders, we will take those opportunities," Google said.

Hedging Their Bets

Others are not so sure Google can pull off its grand experiment. Although many are pulling for the search engine that thinks it can, most are not ready to place bets yet.

Tom Taulli, a professor of business at the University of Southern California and cofounder of the CurrentOfferings.com IPO-focused Web site, said the Google offering has sparked a frenzy, but the real test will be how Google fares over the long term as a public company.

"Every day I get about fifty new signups to the site, and most of them say, 'I want to buy Google shares, where do I send the check?'" Taulli told the E-Commerce Times. "I think there will be a short honeymoon period where they can get away with what they're proposing. But this is Wall Street. If people don't like what you're doing, they can just sell the stock the next minute. At the end of the day, being public exacts a harsh discipline on companies."

Road Not Taken

Even so, Google has plenty of supporters in its bid to upset the definition of what a public company is.

"I'm rooting for Google. A lot of people are," said Jim Davis, senior vice president and chief marking officer at SAS, the world's largest privately held software firm. "It would be wonderful if they could challenge Wall Street. I think it's healthy to challenge the system. The way IPOs and publicly traded companies have been handled over the years has definitely hurt innovation."

Founded 28 years ago, SAS considered going public in the late 1990s but ultimately decided that the pressures of quarterly earnings and forecasts and the potential risks to its employee culture -- it regularly ranks as one of the best companies to work for in the United States -- outweighed the potential benefits of such a move.

"We definitely felt it could have a negative impact on the culture," Davis told the E-Commerce Times, citing his company's current ability to reinvest profits in new product development and additional benefits for its 9,000-plus employees worldwide. SAS has built a reputation as an employee-friendly firm without offering stock options to workers -- an almost unheard-of approach for a software company.

Indeed, widespread distribution of stock options is likely one of the factors that drove Google to file for an IPO. The number of shareholders in a company is one standard by which the SEC measures whether a company must report earnings each quarter, even if its shares are not traded on the open market. Google's number of shareholders currently exceeds that threshold.

Watching, Waiting

Davis and others did say they see enormous benefits in the near future for a public Google, including the ability to invest in acquisitions and reward employees for their loyalty. Over time, however, the founders' ability to retain strict control may be tested.

"A lot of companies have gone public and it led to their demise," said Chris Faulkner, CEO of C I Host, the largest privately held Web hosting company in the United States. "People start a company, [and] it takes on their personality, becomes their baby. As soon as you go public, you lose a lot of that foothold. You're not working for yourself anymore."

In Faulkner's business, C I Host's private status means that if a new technology becomes available, he can decide to invest in it immediately. His publicly held competitors may need to obtain board approval or conduct extensive studies to determine how the technology will affect shareholders.

"Things change overnight in technology," he told the E-Commerce Times. "A public company can become like a battleship -- it can take them five miles just to make a left turn."

Proof of the public-company pressure-cooker abounds, Faulkner argues, in the form of SEC-driven investigations into companies that "do whatever it takes" to make quarterly results look good. "All of sudden, you're booking revenue from 35 days instead of 30 in a month to polish it up a bit," he said.

Venture Driven

Although stock options for employees likely helped prompt Google to file when it did, the desire of its high-profile venture backers to cash out also may have played a role. That likelihood of external pressure prompts some private firms to avoid taking venture funds at all.

Kamran Pourzanjani, president of comparison-shopping site PriceGrabber.com -- whose competitor, Shopping.com, is expected to try to ride Google's coattails into the public markets in the near future -- has taken the no-thanks approach to venture funding.

"For us, it made sense to keep our flexibility," he told the E-Commerce Times. "Going public is not a solution that fits everyone."

Pourzanjani is another tech executive who will be watching Google closely and who thinks that, in the end, the rigors of Wall Street may prevail.

"If they're successful in doing that -- in bucking trends -- that will be amazing," he said. "Investors at some point are going to start looking for their return on their stock investment, going to start holding them to the performance they promised them, even if they don't make many promises."

It's a Good Thing

Because of its sheer size, the Google offering will help the tech industry, USC professor Taulli said. A couple of overnight billionaires and an extended cast of millionaires will be minted, providing an injection of new entrepreneurs into Silicon Valley.

Google also will have to find a way to spend the billions it raises in the stock sale - be it on acquisitions or investments in startups or hardware of its own.

But the first challenge might be in getting the shares sold. Taulli said Google is sailing into uncharted waters. There's never been a public, auction-based IPO as large as Google's, and there may be millions of bids for the shares, all happening at once.

"They say they're going to use their own technology, but I'm not sure it's ready yet," he said.

By all accounts, that challenge will be just the first of many.


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