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August 18, 2005

Google to raise $4.18bn from share sale

Google Inc is to take advantage of the current strength of its share price and raise $4.18bn through the sale of 14.2 million shares, a move that will leave the search engine giant sitting on $7.1bn of cash and equivalents.

By CBR Staff Writer

In an SEC filing, it said the purpose of the sale is to raise additional capital, and said it will use the proceeds for general corporate purposes, including working capital and capital expenditures.

In addition, we may use proceeds of this offering for acquisitions of complementary businesses, technologies or other assets. We have no current agreements or commitments with respect to any material acquisitions, it said.

The speculation recently has been that Google will ramp up its presence in China, probably via the acquisition of an existing big local player, following its rival Yahoo! Inc into the world’s biggest market.

Wall Street kept Google’s IPO price down to $85 per share in August 2004, when the company raised $1.66bn. Since then, a feeding frenzy for the stock has driven it as high as $317.80 and it has joined the ranks of the world’s top 100 most valuable quoted companies in a table compiled by the Financial Times.

Even though the shares fell back 2.04% to $279.29 yesterday on news of the share sale, the company is still valued at $77.6bn.

In its filing, Google noted that its primary competitors are Microsoft Corp and Yahoo. Microsoft recently introduced a new search engine and has announced plans to develop features that make web search a more integrated part of its Windows operating system or other desktop software products, it said.

We expect that Microsoft will increasingly use its financial and engineering resources to compete with us, Google continued. Both Microsoft and Yahoo have more employees than we do (in Microsoft’s case, currently nearly 14 times as many). Microsoft also has significantly more cash resources than we do. Microsoft and Yahoo also may have a greater ability to attract and retain users than we do because they operate internet portals with a broad range of content products and services. If Microsoft or Yahoo are successful in providing similar or better web search results compared to ours or leverage their platforms to make their web search services easier to access than ours, we could experience a significant decline in user traffic.

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Google also warned that its revenue growth rate will decline over time, and it anticipates downward pressure on its operating margin. We experienced both of these trends in the three months ended June 30, 2005. We believe our revenue growth rate will generally decline as a result of increasing competition and the inevitable decline in growth rates as our revenues increase to higher levels, it said. We believe our operating margin will experience downward pressure as a result of increasing competition and increased expenditures for many aspects of our business as a percentage of our revenues.

Google said the margin on revenue generated from its network partners is significantly less than the margin on revenue from advertising on its web sites. The margin on revenue generated from partners could also decrease in the future if they demand a greater portion of the advertising fees.

The number of shares being sold in the latest offer, 14,159,265, also happens to be the first eight digits after the decimal point in pi. When Google IPO’d a year ago, it initially sought to raise $2,718,281,828, which is the first ten digits of the mathematical constant e.

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