Why Google is Trading Privacy for Cash

Analysis — Even as Google ascended from useful search tool to cultural phenomenon, its executives were not too keen on an IPO.

Sure, the cash from an initial public offering of stock could help fund R&D, acquisitions and marketing for years to come, not to mention reward employees for their contributions.

But going public would mean opening the books. That’s an uncomfortable notion for Google executives who talk about their finances as often as J.D. Salinger discusses “The Catcher in the Rye” — as in never.

Google is believed profitable, but until IPO paperwork is filed it’s impossible to be sure. The cloak of privacy has served as a tactical advantage over public rivals. But once the IPO hoopla subsides, the expectations of shareholders, analysts, customers and to a certain extent, the media, await a newly-public company.

Google co-founder and president Sergey Brin has said dealing with quarterly reporting of results would be a headache. But as the Nasdaq perked up, and Internet survivors eBay and Amazon saw signs that the nose-diving economy had leveled off, Brin was apparently swayed.

The Mountain View, Calif., company is moving ahead, expected to be in the process of choosing investment banks to lead an IPO that could value Google at up to $25 billion — a range evoking nostalgia for the dot-com heyday. The moves come as the search industry is undergoing changes sparked by paid placement, which reinvigorated the sector and raised the value of the companies in it.

Morgan Stanley has been mentioned as the frontrunner for the much-anticipated offering, although it’s not uncommon for more than one investment bank to handle an issue of this size. Google is mum on its IPO plans.

But how the Silicon firm uses the cash it could raise in an offering could determine whether it stays atop the white-hot search sector, or is eclipsed by well-heeled rivals Yahoo and Microsoft . Both competitors have plotted search strategies as interest among advertisers and consumers in paid search grew this year.

In July, Yahoo spent $1.6 billion for marketing search specialist Overture, a move that likely prodded Google into the IPO chute sooner than planned. At about the same time, Microsoft approached Google about a partnership or buyout, an offer it declined.

Charlene Li, principal analyst with Forrester Research , said Google must continue cultivating publishing distribution partners in order to hold its lead in the sector. She called the recent expansion of its relationship for Web and sponsored search with ISP giant AOL a good start.

“It’s going to be a very expensive fight and they have to keep building their traffic against Overture and eventually (Microsoft’s) MSN, which has a huge arsenal of technology,” Li said.

Industry watchers also noted that independent player Ask Jeeves has been making strides among users after spending much of last year retooling its site.

Danny Sullivan, a search engine expert who runs the Search Engine Watch Web site (published by the parent of this site), said it’s difficult to speculate on Google’s plan, or, for that matter, if it even has one.

“I don’t think Google is going public primarily to raise money for acquisitions,” he said. “Instead they seem almost forced to do it because of the many stock options their employees have. So while they’ll have lots of money, it doesn’t mean they’ve got a predetermined shopping list.”

That said, Sullivan sees Google buying companies that bolster its core strengths and cut into it competitors’ business, such as its acquisitions of content-targeted ad player Applied Semantics and paid placement specialist Sprinks earlier this year. More recently, Google snapped up search Kaltix, a context-sensitive search technologies that was formed only six months ago.

There was also the rumored $30 million bid for online dating network Friendster (an offer that was reportedly spurned in favor of additional venture capital financing), Sullivan said.

Even its previous purchase of self-blogging tools provider Blogger shows that Google is willing to pursue new features, as investment bankers now pursue Google.

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