Monday, April 19, 2004

Rule may compel Google to open books

By Michael Bazeley
Mercury News

Rampant speculation about a possible public stock offering has turned Google into the most closely watched technology company in the world.

Now the Mountain View Internet company may be forced to show its hand.

Privately held Google appears to have triggered a provision of the 1934 Securities and Exchange Act that requires it to disclose closely guarded financial details by the end of the month.

The filing, with the Securities and Exchange Commission, would reveal so much about the secretive firm that many experts believe Google might take the next logical step and file for an initial stock offering, reaping the financial rewards that go along with having to open its books.

``It's a terrible place to be in because you get all the disadvantages of being a public company and none of the advantages,'' said Scott Spector, an attorney with Fenwick & West in Palo Alto. ``I can't imagine the company wanting to be in that situation.''

Google officials have been tight-lipped about the reporting requirement and possible plans for an IPO, and they declined to comment for this story.

But many observers believe that Google has triggered the requirements to become a ``publicly reporting'' company.

Companies must report financial results to the SEC once they have at least $10 million in assets and more than 500 shareholders of record, including employees who hold stock options. Google's profits are thought to be $100 million or more. And the assumption -- reinforced by Google's Web site, which touts ``pre-IPO stock options'' to prospective employees -- is that the company has granted stock options to most of its more than 1,000 employees.

If those assumptions are true, then Google should have to start making quarterly filings to the SEC by April 30, which is 120 days after the close of its fiscal year.

Reporting companies must disclose the same information to federal regulators as publicly traded companies, including assets, liabilities, operating expenses and partnerships. But they do not trade their shares on the Nasdaq or New York stock exchanges.

``The notion is that once you have 500 shareholders, you are a public company,'' said Peter M. Astiz, a securities attorney with the Gray Cary law firm in East Palo Alto. ``The effect is you become public. They have to report all the same numbers.''

Most companies view this middle ground with disdain because they spend millions to comply with government regulations and get nothing in return.

In fact, filing this paperwork can come with disadvantages. In some circumstances, employees or investor shareholders can start selling their shares on the over-the-counter bulletin board. Companies typically prefer to control when and how their shares are traded.

Companies that grow big enough to hit the filing requirement typically opt to become a publicly traded company first, attorneys said. That's because public stock offerings can enrich employees and investors, and they give the company access to cash that it can use to innovate or acquire other companies.

Google executives have appeared in no hurry to become a public company, in part because it would begin to lift the veil of secrecy under which they seem to enjoy working. What is more, the company's revenue stream appears strong, and it may not need the money that an offering of public stock would generate.

Also, Google may not want to undergo the cultural shift that takes place in companies when they have to meet analyst and shareholder expectations every quarter. Google may turn out to be the rare company that willingly files public financial reports but doesn't publicly trade its stock.

Another option is for Google to dodge the public reporting requirement. In 2001, the SEC detailed how companies can do so: by disclosing their financial information only to shareholders.

``You've got to give them the same information that you would otherwise give if you were public,'' Spector said.

Preparing the financial information is costly, and companies run the risk of the information leaking to outsiders. But several companies have picked this option.

``I would think Google would move mountains to not go public this way,'' said Kip Weissman, attorney with the Luse Gorman Pomerenk & Schick law firm in Washington, D.C.

Google could also buy back its shares from employees and investors, but few experts said they believed that was likely to happen.

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