CurrentOfferings.com Story:

Google's good-vibes public offering hits a sour note

By Michael Liedtke, Associated Press, Aug. 7, 2004

SAN FRANCISCO -- All the glee and glamour surrounding Google Inc.'s IPO is rapidly dissolving into feelings of dread and derision about the online search engine's long-awaited stock market debut.

The backlash has been mounting since Google's July 26 disclosure about its plans to sell 24.6 million shares at $108 to $135 apiece -- an unprecedented per-share price for a U.S. initial public offering.

The second guessing has become even more prevalent in recent days amid widespread confusion about the unorthodox auction Google is using to distribute its IPO shares and worries about potential legal problems involving how the company doled out stock in the past.

Google also hasn't set a specific date for the start of the auction, although its latest SEC documents indicate it might happen this month. News reports have said Google could begin the auction next week.

To make matters worse, investors are souring on the stocks of many Internet companies, amplifying the questions about whether Google's IPO can possibly live up to its tremendous hype.

"This could turn out to be a real dud," said Tom Taulli, a longtime IPO analyst.

A Google spokeswoman would not comment Friday, citing securities laws that limit the public remarks companies can make before their IPOs. Those restrictions have left Google defenseless against its critics, a handicap helping to propel the attacks against the IPO.

"Part of the reason for this backlash is that the only voices we are hearing are potential buyers, and they don't want to do or say anything to promote the stock that would drive the price higher," said Barry Randall, portfolio manager for the First American Technology Fund.

Google's target IPO price appears to be the company's biggest public relations problem. Since the company established the price range, "it seems like the commentary [about the IPO] has been turning more and more negative," said Matthew Crowder, who runs a popular online discussion board at www.google-ipo.com.

Much of the investor resentment seems to center around Google's refusal to split its stock before its IPO. That decision assured Google's shares will be priced well above the $7 to $15 typically demanded in the IPOs of U.S. companies.

If it had done a 10-for-1 stock split, Google could have pushed its IPO into that range while raising the same amount of money and still realizing a lofty market value of $29 billion to $36 billion.

Because individual investors typically feel more comfortable buying stocks with a nominally lower per-share price, Google probably would have generated more investor enthusiasm with a pre-IPO stock split, experts said.

"A $15 stock just looks less intimidating than a $100 stock, even though the mathematics don't really change," Randall said.

Google instead decided to follow the lead of billionaire investor Warren Buffett, who thinks stock splits attract speculative, rather than long-term, investors.

Google also flouted tradition by choosing to sell its IPO shares through a Dutch auction designed to ensure that individual investors have a chance buy the company's stock.

Historically, the investment bankers handling the IPO distribute most of the shares to institutions and a privileged few.

But the company's attempt to democratize the IPO process doesn't appear to be working. Many investors seem confused about how the auction will work. Others are worried the egalitarian approach will draw too many unsophisticated investors who will drive the IPO price so high that the shares will plummet when they begin trading on the Nasdaq.

Google also is dealing with possible legal problems because it didn't register nearly 29 million common shares and stock options issued to employees and consultants from September 2001 through June of this year.

The distribution may have violated securities laws in 18 states. The company is offering to buy back the affected shares and options for $25.9 million. In Securities and Exchange Commission documents filed Friday, Google said the so-called recision offer "is not an unanticipated development" and reiterated its belief that most employees and consultants won't accept the offer. The affected shares will automatically become registered once the IPO is completed.

But Google still could have problems with regulators. The California Department of Corporations has launched an investigation into the situation -- an inquiry most likely to result in no more than a relatively small fine, said securities attorney Bob Clarkson. But he said he wouldn't be surprised if other states open similar investigations into Google because of the large amount of money at stake.

TOM TAULLI, a long time analyst covering IPOs, is a co-founder of Current Offerings.