Microsoft and Google: Partners or Rivals?

October 31, 2003
By JOHN MARKOFF and ANDREW ROSS SORKIN

SAN FRANCISCO, Oct. 30 - Wall Street is not the only one
wooing Google. Microsoft is as well.

Google, the highflying Silicon Valley Web search company,
recently began holding meetings with bankers in preparation
for its highly anticipated initial public offering as it
was still engaged in meetings of another kind: exploring a
partnership or even a merger with Microsoft.

According to company executives and others briefed on the
discussions, Microsoft - desperate to capture a slice of
the popular and ad-generating search business - approached
Google within the last two months to discuss options,
including the possibility of a takeover.

While the overture appears to have gained little traction -
Google indicated that it preferred the initial offering
route, the executives said - it demonstrates the enormous
importance that Google represents as both a competitive
threat to Microsoft and as Silicon Valley's latest hope for
a new financial boom.

Though seemingly spurned, Microsoft may still be interested
in pursuing Google at a later date, according to an
executive briefed on the discussions.

Both Google and Microsoft executives refused to comment.


Google, which was founded by two Stanford computer science
graduate students in 1998 and quickly became one of the
most popular Web sites in the world, has in recent weeks
become the subject of intense speculation since it
indicated to Wall Street that it hoped to sell shares of
itself to the public sometime in the first half of next
year.

Google's ability to stir Silicon Valley into a frenzy has
also brought back memories here of Netscape, another
start-up firm whose own initial public offering in 1995
helped touch off the dot-com explosion. Netscape once
threatened Microsoft with a software browser that promised
to be an alternative to its overwhelmingly dominant
computer operating system.

Microsoft responded by significantly altering its business
and adding its own browser as a free component of its
Windows operating system, ultimately undercutting
Netscape's business.

Google recently started wheedling down a long list of
investment banks it approached earlier this month about
underwriting the offering, which could be worth from $15
billion to $25 billion, the executives said. The company,
which maintains tens of thousands of computers to help
locate information on the Web almost instantly, has also
explored the idea of a so-called Dutch auction, bypassing
Wall Street and selling shares directly to investors. Such
an approach could give it distance from scandal-plagued
investment banking deals of the dot-com era as well as
create a huge base of small shareholders.

The auction route is said to appeal to Google's founders,
Sergey Brin and Larry Page, who are known for their
fascination in pursing technical solutions to many
different kinds of problems.

But it appears that Google is more likely to take the
traditional path of using Wall Street to sell its initial
offering. It is still toying with the idea, executives
said, of using an online auction for a possible secondary
offering as a way to allow its millions of users to have a
better opportunity to buy its shares.

The company is considering selling about a 10 to 15 percent
stake to the public, which is expected to raise more than
$2 billion to be used to invest in the business and
generate wealth for its employees, venture capitalists and
early investors. Among the banks still competing for the
business are Goldman Sachs, Morgan Stanley, Credit Suisse
First Boston, Citigroup, J. P. Morgan Chase and Thomas
Weisel Partners, the executives said.

Morgan Stanley is viewed as the frontrunner, the executives
said, though Google may choose two banks to lead the
underwriting effort. Goldman Sachs is also viewed as a
contender, the executives said, but Google's management has
shown some concern about Goldman's close relationship with
Microsoft and Yahoo, another major competitor.

Google has a clearly dominant position in Internet
searching, which has served as the foundation of a
fast-growing and highly profitable advertising business
built around placing specific text ads close to Web queries
on similar subjects. Its rapid revenue growth, however, has
begun attracting large competitors like Yahoo, which has
acquired Overture, a leading search ad provider. While
Microsoft and Amazon.com are both considering getting into
the business, the growth in Google's Adwords keyword
business has, at least for now, started to slow, according
to a person with knowledge of the company's business.

Microsoft as a search competitor could change the market's
assessment of Google's value. Moreover, if Microsoft
attempts to integrate Web search features directly into its
coming Longhorn operating system, it could restart the
bitter feud that led to the government antitrust case that
grew out of Netscape's failure.

Partly in response, Google continues to explore new
businesses to extend its reach into new markets and to find
new sources of revenue. One such effort included
approaching Friendster, a Silicon Valley social networking
company that has recently grown rapidly, according to an
executive briefed on the talks. Friendster has instead
received a $13 million investment from a group of venture
capitalists led by Kleiner Perkins and Benchmark Capital,
an action that was first disclosed in The Wall Street
Journal.

In Silicon Valley, executives and venture capitalists
remain divided over the consequence of Google going public.
Several people close to the two venture capital firms that
are the major Google investors - Sequoia Capital and
Kleiner Perkins Caufield & Byers - said that partners at
the firms had been focusing closely on the timing of the
Google offering, hoping to help jump-start a rebirth of the
technology market of the 1990's.

But many other venture capitalists here say that Google is
such a unique company that its offering, if and when it
comes, is not likely to set off a similar train of events.

"There was a time we were all looking forward to Google,"
one venture capitalist said on Thursday. "But it's become
such an unbelievable event that it is a juggernaut. I no
longer believe that it will open up the I.P.O. market
broadly."

John Markoff reported from San Francisco; Andrew Ross
Sorkin from New York.

http://www.nytimes.com/2003/10/31/technology/31net.html?ex=1068650535&ei=1&e
n=5a2995802329ecb1


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