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Google Slashes Its IPO Price Range

Posted on: Wednesday, 18 August 2004, 06:00 CDT

By MATTHEW FORDAHL

SAN JOSE, Calif. (AP) -- Google Inc. (GOOG) dramatically lowered expectations for the Internet search giant's value Wednesday ahead of its much ballyhooed coming out party in the public markets. The offering is still one of the biggest and highly anticipated for an Internet company, surpassing the hot issues of the dot-com boom.

The world's most popular search engine said Wednesday it now expects its stock to sell for between $85 and $95 per share, down nearly a third from its old forecast of $108 to $135. It also said the total number of shares to be sold will be cut to 19.6 million from 25.7 million.

Google Inc. closed the unorthodox auction to set its initial stock price Wednesday after receiving final approval by the Securities and Exchange Commission to proceed with the long-awaited stock sale.

Before trading begins, the company and its underwriters must announce the share price of the initial sale, notify winning bidders and allocate shares. That could happen anytime Wednesday afternoon or later.

Google would raise $1.86 billion if the final stock price is set at $95, rather than the $3.6 billion initially possible. And Google's market capitalization at $95 a share will be less than $26 billion, down from the original high-end estimate of $36 billion.

Investors who bid above the selling price will only pay the per-share IPO price. If there's demand for more than the company's 19.6 million shares, successful bidders may get just a percentage of what they requested.

Once the price is set and initial shares sold, the stock could begin trading, possibly as early as Thursday morning, under the symbol "GOOG" on the Nasdaq Stock Market.

The bumpy IPO process has created several clouds over the company that has been criticized for being too idealistic, arrogant and reckless since it began the IPO process four months ago.

Its prospectus indicates that Google still faces regulatory questions. In one case, it said the SEC "has requested additional information concerning the publication" of an interview of Google founders Sergey Brin and Larry Page that appeared in September's issue of Playboy magazine. That was a potential violation of the SEC's rules against talking publicly before an IPO about information that is not included in the prospectus.

Google also has admitted that the agency has launched an informal inquiry into its issuance of millions of pre-IPO shares and options without registering them.

The auction - another source of controversy - was supposed to democratize the IPO process, which is usually limited to investors connected to investment banks. Still, many analysts questioned whether Google's projected price was affordable to average investors.

Before the surprise announcement early Wednesday, first announced in an e-mail to potential investors, some observers had questioned whether Google's triple-digit price estimate was realistic, given the rocky stock market conditions in recent weeks. Several companies, in fact, have delayed or abandoned plans to go public.

But Google, until Wednesday, surprised many by bucking the market trends for so long. In fact, it's repeatedly been a source of surprises since it announced its public stock offering in April.

It eschewed Wall Street tradition and decided that the final IPO price would be set by an auction. Its founders wrote an idealistic letter in its prospectus, outlining the company's "Don't Be Evil" mantra and plan to avoid the trappings of traditional companies.

Google also has been embroiled in controversies. It revealed that millions of its pre-IPO shares and options were issued to employees and contractors without being registered, prompting a SEC inquiry.

John Tinker, an analyst at ThinkEquity Partners, said the initial price range was overvalued and he wasn't surprised about the lowered price range, citing how the auction process has been sloppy and complicated, and further exasperated by Google's Playboy interview.

"The stock market has also been off, and Google has got to be affected by that," he said.

Despite the missteps, few deny that Google is both very popular and prosperous.

Since it was founded in 1998 by Stanford University students Page and Brin, it has always been something of an oddball. Its design has no flashy ads but a simple, quick-loading layout. Its search algorithm out-powers rivals. Its name became synonymous with Internet search.

The Mountain View-based company, which makes money by selling unintrusive text advertising, managed to prosper as a private company even while other dot-coms were collapsing. Now, as the technology industry is just recovering, Google stands to prosper even more.

In the second quarter of this year, for instance, Google earned $79.1 million, more than double the $32.2 million earned in the same period last year. Sales also more than doubled, to $700 million in the latest period.

Page, Brin, employees and other early investors stand to profit handsomely in the IPO - even with a lower anticipated range.

According to Wednesday's filing, the co-founders will each offer about 480,000 shares, which will be worth $43.2 million based on a final IPO price of $90, the midpoint of the new range. Initially they planned to sell 1 million shares apiece. They each will hold enough other shares to make them billionaires, at least on paper, if the IPO is successful.

Venture capitalists won't be offering any of their shares initially, canceling major payouts. Google board member John Doerr of Kleiner Perkins Caufield & Byers was to have sold 2.1 million of his 21 million shares; Michael Moritz, another board member and a partner at Sequoia Capital, was to shed 2.4 million of his 23.9 million shares.

But Yahoo Inc. (YHOO) and America Online Inc., which were early investors in Google, still plan to sell. Yahoo, now one of Google's biggest rivals, is selling 1,610,758 shares; AOL will unload 743,745, according to the filing. At $90 per share, Yahoo would collect $145 million, while AOL, part of Time Warner Inc. (TWX), would reap $66.9 million.

According to Google's e-mail, pre-IPO shareholders expect to sell 5.5 million shares, less than half the 11.6 million originally planned. The company itself will sell 14.1 million shares, which is unchanged from previous filings.

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