October 29, 2003

Google Inc.'s long-awaited initial public offering is expected to fill the company's coffers with a lot of cash.

So now what? The answer to this deceptively simple question will shape the future not only of the Mountain View, Calif., Internet giant but of Silicon Valley itself. In the short term, at least, Google is unlikely to scrap its M&A; blueprint, which has focused on small, strategic acquisitions, in favor of major deals.

"I wouldn't expect to see Google go on a buying binge," said Matthew Berk, senior analyst with Jupiter Research. "It's more of a strategic war chest." Although as a public concern Google will be accountable to shareholders, the company's bright growth prospects mean Google does not urgently need acquisitions to fuel growth, said Derek Brown, research analyst with Pacific Growth Equities Inc.

"Being public puts more pressure on growth, but I don't think growth is too much of a problem right now," he said. "You're not talking about a 50-year industry that's growing 2% a year. The industry is still nascent and is changing every day, and by most measures it is growing at a pretty phenomenal clip." Danny Sullivan, editor of Searchenginewatch.com, said Google retains a technology edge over industry rivals Microsoft Corp., which is developing its own "paid search" product, and Yahoo! Inc (Nasdaq:YHOO - news)., which in the past year has acquired search companies Inktomi Corp. and Overture Services Inc. (Nasdaq:OVER - news)

"People look at the Yahoo deals and say it has invested $2 billion in search, so Google needs to go public and get $2 billion too," Sullivan said. "But what they forget is Yahoo had to invest $2 billion in search because they didn't have a search product. Google doesn't need to buy the car; they just need the money to make the car a little spiffier." Google has made several deals of late to do just that. In September, for example, it bought Kaltix Corp., which builds personalized and context-sensitive search tools that Google says represent the next wave in search engine technology. In April it also bought Applied Semantics, a producer of software applications for online advertising and semantic text processing.

Although Google's purchases have been aimed mostly at filling out its products suite, the company increasingly may have to make acquisitions that both exploit new opportunities and ward off competitors. For instance, with its deal earlier this month for Sprinks, a pay-per-click advertising network formerly owned by Primedia Inc., Google "gained a distributor of their product and eliminated a competitor," Sullivan said. Berk said Google's future deals will center on either eliminating competition or acquiring customers. "Their biggest competitor was Overture, which was not a big threat," he said. "Now the threat is Yahoo, a big monster, so they need the war chest so they can play with a big competitor."

Berk said Google also could have interest in a company such as Ask Jeeves Inc., because the Emeryville, Calif., Web search provider would expand Google's advertiser base and distribution. He also cited Go Toast LLC, which helps companies enhance the result of Internet searches, as another good fit because it would complement Google's search business. In addition, Google could branch out into other Internet search products and services, including providing Internet yellow page directories. That would bring companies such as InfoSpace Inc. of Bellevue, Wash., and Switchboard Inc. of Westboro, Mass., into Google's orbit.

Although Google's IPO, which the company reportedly plans for early next year, bodes well for the company, the offering could have an even bigger impact on other dot-coms. Tom Taulli, a professor of finance at the University of Southern California's Marshall School of Business, said Google's offering will encourage other Internet companies to go public, while noting that investors remain cautious. "At a minimum the companies will have to be at or near profitability, or they will have to have something so compelling that makes them stand out," he said. "What makes Google so alluring is that it is wildly profitable. There aren't many of those in the marketplace."

Greg Smith, a partner with Skadden, Arps, Slate, Meagher & Flom LLP, said the law firm has recently seen a surge in IPO-related business but that dot-coms "continue to be a much harder sell than other technology companies." He said Skadden represents one tech company that has filed for an offering and another that expects to file in December, but neither is a dot-com. "I wouldn't consider Google to be a bellwether company with respect to the IPO market," Smith said.

Among the larger Internet companies believed to be exploring going public are Blackboard Inc., a vendor of online education management software based in Washington; antispamming company BrightMail Inc. of San Francisco; and SalesForce.com Inc., a San Francisco-based maker of customer service software. Michael Stanton, a spokesman for Blackboard, said a public offering is "certainly a possibility," noting that it would offer an obvious way for investors to recoup the roughly $103 million they have invested in the company. But he said an IPO is "not a necessity" because the company is cash-flow positive.

Brightmail CFO Mike Irwin would not comment on the company's IPO plans, noting only the company "is doing very well, and the financial markets are heading in the right direction." An official at SalesForce declined to comment.

Ken Marlin, founder and managing partner with M&A; boutique Marlin & Associates LLC, said private companies looking to go public need a minimum of $50 million in revenue. They also require "positive cash flow and a clearly demonstrated history of top-line growth," he added. "If you don't have all three, you're not a candidate for an IPO in today's market."

Source: Yahoo News

        

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