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AUGUST 19, 2004
COMMENTARY
By Ben Elgin

Google: Whiz Kids or Naughty Boys?
Does its management team have the right kind of smarts to run a public company? In light of recent missteps, the Street has its doubts


Even when Google was bathed in adulation and investor exuberance, its management was a question mark. After all, how could Larry Page and Sergey Brin, the thirtysomething co-founders and unquestioned leaders of the search trailblazer, be expected to propel Google (GOOG ) to the top of a market populated with brawny and seasoned competitors such as Microsoft (MSFT ) and Yahoo! (YHOO )?


Google was long able to shrug off such questions by simply pointing to its track record. Page and Brin zeroed in on search in the late 1990s, even as competitors wrote it off as insignificant. They killed a multimillion dollar ad blitz in 1999, instead banking on word-of-mouth marketing. And they silenced efforts to clutter their site with banner ads, favoring instead a spartan home page. Slam dunks, all.

"CHALLENGING AND DIFFICULT."  Now, amid a series of missteps on its road to a public offering, Google's management is coming under much closer scrutiny. In its pre-IPO paperwork, Google disclosed it may have violated securities laws by improperly allocating more than 23 million shares to employees and consultants -- no minor oversight. In its early pre-IPO presentations to would-be investors, Google's founders came off as elusive and ill-prepared, according to analysts and money managers.

The company also suffered an embarrassment on Aug. 18, when it had to scale back the size and price of its unusual Dutch auction public offering. Presumably because of underwhelming investor demand, Google cut the expected price to between $85 and $95 per share from the previous $108 to $135 range, at the same time it slashed the number of shares offered to 19.6 million, from 25.7 million.

All told, its intensely scrutinized transformation from private company to public has left some investors and analysts concerned about Google's leadership. "These guys are challenging and difficult," says one investment banker not involved in the offering. "One thing the market absolutely finds a way to crush is arrogance."

Already, some are mulling whether Google needs a management overhaul. Martin Pyykkonen, analyst at Janco Partners, believes the search kingpin would be better off taking the day-to-day reins from Google's founders and handing them to a more operationally savvy executive, perhaps one or two years from now. "It'll be important to bring in the right leaders at the right time," he says.

FACT VS. FANCY.  As for today, just what kind of clout does Google's oft-described "adult supervision" have? It's a fair question. On paper, the founders Brin and Page operate as a triumvirate with CEO Eric Schmidt, who was hired in 2001 to bring some experience to Google's executive ranks.

Make no mistake: It's a founder-driven company, with Brin and Page wielding veto power over every key decision at the company. Seasoned execs like CEO Schmidt and board members John Doerr of Kleiner Perkins and Michael Moritz of Sequoia Capital play a supporting role to the two youngsters. And, while the end result seemingly worked well for years, it has not aced its transformation to a public company.

Take the IPO and proposed valuation of Google. Page and Brin, of course, want to run a different kind of public company, focused on innovation and long-term results, rather than the short-term quarterly goals espoused by much of Wall Street. It may be a noble ideal. But while Google vowed in its pre-IPO paperwork to avert long-held Wall Street practices, such as offering financial guidance to investors, it also originally projected a sky-high market cap of $36 billion.

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