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THE NATION

At $1.7 Billion, Google's IPO Comes Up Short

August 19, 2004|Chris Gaither | Times Staff Writer

SAN FRANCISCO — In trying to include the public in its initial public offering, Google Inc. found that bringing the Internet's populism to Wall Street can be messy.

The company that created the world's No. 1 search engine on Wednesday cut the value of its IPO in half, to $1.7 billion, hours before its shares were expected to start trading today.

In an unusual auction process, Google's stock sold for $85 a share, much less than the company originally had projected. And Google insiders, facing surprisingly weak demand from investors, chose not to sell as many of their own shares as planned.

The changes cut Google's total stock-market value to $23.1 billion. The company had put its value at as much as $36 billion.

The lower-than-expected price was only one of several problems the Mountain View, Calif., firm encountered in trying to craft an IPO that would buck Wall Street convention.

Google's goal was to help individual investors own a piece of the company their mouse clicks had turned into Silicon Valley's hottest up-and-comer. But the firm's auction process confused many people and alienated professional money managers.

"They broke all 10 commandments of a successful IPO," said Tom Wyman, portfolio manager of Husic Capital Management.

The Securities and Exchange Commission approved Google's paperwork Wednesday, clearing the way for the shares to debut today on Nasdaq under the ticker symbol GOOG.

In July, Google figured its shares would fetch between $108 and $135 and the IPO would total $3.7 billion. But waning investor enthusiasm dragged the deal price down to $85 a share.

Some of the problems were beyond Google's control. Many tech stocks have plunged in recent weeks in response to weak corporate profits and reduced sales forecasts. And soaring oil prices and an anemic labor market have spooked some investors, making them less willing to buy a speculative stock.

But analysts and professional money managers assign some of the blame to Google. It chose to hold its IPO in August, a summer-vacation month when many on Wall Street are away.

In addition, company founders Larry Page, 31, and Sergey Brin, 30, made unorthodox decisions to keep investors focused on Google's long-term health, not its short-term results.

For instance, they said they wouldn't issue financial projections and would keep most of the decision-making power with top executives by issuing two classes of stock. They also will allow employees to cash in by selling millions of shares in the first six months after the IPO, potentially flooding the market.

All that left many institutional investors unwilling to pay a triple-digit share price Google believed it would get.

"The uniqueness of it ended up driving away the sizable investors that they really needed to be part of the offering," said Andrew Schroepfer, president of Tier1 Research.

Early on, investors clamored for a piece of the company founded when Page and Brin were Stanford University graduate students. Google changed the way people find information on the Internet and, unlike many failed dot-coms, became hugely profitable in the process: It's expected to earn about $1.20 a share this year on revenue of nearly $3 billion.

Rather than mount a traditional IPO -- in which investment banks dole out shares to preferred clients, leaving most mom-and-pop investors on the outside looking in -- they decided to hold a Dutch auction, modeled after a method used to sell flowers in Holland.

In such auctions, investors submit bids for how many shares they want and at what price. The bids are used to set a price that ensures that all stock is sold.

One goal is to avoid big price swings after the IPO by determining demand for the stock before it's sold. The process also tries to ensure that if the price is bid up, the company, not favored investors, will benefit.

Investors were invited to use the Internet, phone or fax to bid for as many shares as they wanted at whatever price they were willing to pay. Bidders began registering online July 30; the bidding started Friday.

The company hasn't disclosed how many bids were placed -- or the range of prices offered. But after Google's bankers sifted through them, they cut the number of shares to 19.6 million from 25.7 million and lowered the price. The stock will go to bidders who committed to forking over at least $85 a share.

Quoc Do, a software programmer for a Pasadena mortgage company, bid $120 a share Tuesday. After he learned that Google had cut its price estimate, he changed his bid to $95. He said he was happy to get the stock at a 21% discount.

"I think Google is going to be a great Internet company in the next 10 years," said the 32-year-old Los Feliz resident. "I plan to hold on to it for five, 10, 15 years."

Other people, like Roberta Marti of Altadena, were confused by the process. The retired administrative assistant decided not to invest in Google because the stock seemed risky and the process mystified her.

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