Google IPO Primer

When Internet search site Google filed its long-awaited plans to sell shares to the public last week, it set off a flurry of analyses about the outcome of the IPO as well as the past and future of the company. So, what does this all mean for investors?

The Buzz Behind Google

Google was founded in 1998 by Larry Page and Sergey Brin, who are purported to own one-third of the company. Venture capital firms Kleiner Perkins Caufield & Byers and Sequoia Capital Partners also own a portion of the company, as does Google's rival, Yahoo! Inc.

The moniker Google is derived from "googol," which is the term for the number 1 followed by 100 zeros. Google's founders chose this name to "reflect the company's mission to organize the immense amount of information available on the Web."

With more than 200 million searches conducted every day, Google has emerged as the Web's most popular search engine, accounting for more than 41 percent all of search queries, according to WebSideStory. Although the company refuses to reveal exact details about its operation, it is estimated to employ more than 1,000 people — known as Googlers — and runs on a network of more than 100,000 servers worldwide.

How Does Google Make Money?

Google makes money by selling targeted ad space alongside individual search results. After five years in business, the company is generating close to $1 billion in annual revenue from the ads placed on its Web site and the sites of its partners. Recently, it has expanded its business to include an e-mail service, Gmail, which distinguishes itself by allowing users to quickly locate their messages, which are housed on Google's servers.

IPO 101

An IPO, or initial public offering, represents the first time a company issues stock to the public, hence the term "going public." Essentially, an IPO represents the first opportunity to purchase ownership (i.e., stock) in a company that has been privately owned. When a private company decides to go public, it hires a lead underwriter, typically an investment bank, which serves as a middleman of sorts.

The underwriter buys all shares of stock the company is selling and then sells them on the open market. The underwriter is also typically responsible for setting the price at which shares will be offered on the first day of trading, and the price is usually related to the demand for the stock. With regard to the Google IPO, Morgan Stanley and Credit Suisse First Boston are the lead underwriters in the sale of its IPO shares.

Prior to the actual IPO, the company and underwriter need to accomplish several things, including notifying prospective investors of the upcoming IPO in "tombstone" advertisements in the financial press and filing a "red herring" prospectus with the Securities and Exchange Commission.

"Tombstone" ads provide the name of the company, the number of shares to be offered, the price per share and the name of the underwriter(s). A "red herring" prospectus derives its name from the red ink label on the cover of the prospectus warning prospective investors that the information is incomplete. Basically, a red herring outlines the history of the company-including its industry, competition and financial strength — as well as its business plan moving forward, taking into account how it will use the proceeds from the IPO.

IPOs for the Average Joe

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