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Google prices its shares at $85

By David A. Vise
The Washington Post

Google co-founder Sergey Brin

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After several months of hype and warnings surrounding the IPO, the Internet's leading search engine and its two founders were humbled by market forces, missteps of their own making and opposition from the Wall Street establishment, which stridently opposed their novel method for distributing shares because it cut fees and reduced the clout of the major brokerage houses.

While Google's roughly $1.7 billion IPO will still rank among the biggest technology offerings ever, the difficulty the online giant is experiencing is a sign of the troubled times for technology companies that want to go public and attract capital. Investors who once bid up the price of anything that had the dot-com label are showing a new cautiousness in the aftermath of the bursting of the high-tech bubble several years ago.

Dozens of tech firms have pulled plans for IPOs in recent weeks, and Google's travails are going to make it even harder for Silicon Valley firms to tap into the stock market.

	Google co-founder Larry Page

"Google is putting a nail in the coffin for technology IPOs," said Tom Taulli, author of a book about initial public offerings. "It will be difficult for the next six months to get technology offerings off the ground. We will see a shakeout in the IPO market for tech stocks. After all, if Google can't get a good price and is having difficulty with its own IPO, it overshadows everybody."

To salvage its public offering, Google took several steps to win over wary investors. Co-founders Sergey Brin and Larry Page sharply reduced the number of shares they planned to sell personally in the offering, while two venture-capital firms, Kleiner Perkins Caufield & Byers and Sequoia Capital, abandoned plans to sell stock at the present time. Such sales by corporate insiders are often regarded suspiciously by investors who worry the actions reflect a lack of confidence in a company's prospects.

In addition, Google reduced both the price and size of its offering by about 25 percent. The IPO price plunged from an estimated $121.50 to $85 per share, the bottom of its revised range, while the number of shares dropped from about 25.7 million to 19.6 million shares. The result cut Google's total stock-market value from about $30 billion to roughly $23 billion — a big drop but still more than double the market value for Sears, Roebuck and Co.

"The thing that hurt them the most was the spurning of Wall Street," said Danny Sullivan, editor of Search Engine Watch, an online publication that monitors the search industry. "If this had been a traditionally run IPO where investment banks were going to cash in, they would have been supportive of the higher price, and you would have seen less criticism. They felt locked out of the process, so there was no incentive for them to move things along."

The Securities and Exchange Commission formally approved the company's prospectus describing the revised offering yesterday at 4 p.m. Eastern time. Experts said they expect that Google stock will begin trading as early as today under the ticker symbol "GOOG."

One reason investors had balked at Google's offering was the price of its shares. Since the company stated that the estimated range for the IPO was $108 to $135 a share, the price of technology stocks in general, and Yahoo! in particular, have declined significantly. Yahoo! is viewed as Google's primary competitor, and its valuation is regarded as the best proxy to use when valuing Google.

Under the revised terms of the offering, Google would begin trading at a valuation that is about 10 percent lower than that of Yahoo!, according to Scott Kessler, an analyst with Standard & Poor's.

"Some people say Wall Street is rejoicing because Google was arrogant," said Andrew Goodman, author of an upcoming book about the search engine. "Others who run public companies say this was bound to happen when there is so little demand in the stock market right now for IPOs. Their comeuppance is coming partly from Wall Street. But fittingly, it is coming even more from investors, who were unwilling to pay such a high price."

Google has fat profit margins and earned $143 million in the first half of this year, when it posted sales of nearly $1.4 billion.

Under the terms of the electronic auction — the largest ever on Wall Street — investors bid on shares and the company used those bids to determine a "clearing" price that would enable it to sell the 19.6 million shares it is offering. Anyone who bid at or above the clearing price would be allocated shares.

Brin and Page, who founded the company in 1998 when they were in their mid-20s, are each slated to sell stock in the IPO worth about $41 million. On paper, their remaining holdings would be worth about $3.2 billion each, making them the nation's newest billionaires.

Copyright © 2004 The Seattle Times Company

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