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Google Ends Auction for IPO Shares

Price Is $85 a Share, At Low End of Estimate

By David A. Vise
Washington Post Staff Writer
Thursday, August 19, 2004; Page A01

Google Inc. yesterday closed the unusual auction for its shares and prepared for its stock to begin trading at $85 per share, after weaker-than-expected demand from investors forced it to drastically slash the price and size of its initial public offering.

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.

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Gambling on Google: Dot-coms hope Google's IPO will spark new interest in tech. This chart tracks IPOs launched before and after Google's announcement.
_____Press Release_____
Google IPO -- Notice of revised date to have the registration statement declared effective (Aug 18, 2004)
_____Google In The News_____
Investors Greet Google With a $27 Billion Smile (The Washington Post, Aug 20, 2004)
Insiders Get Rich Through IPO (The Washington Post, Aug 20, 2004)
A Gaggle Of Google Critics (The Washington Post, Aug 20, 2004)
Complete Coverage: Google
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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 have been cautious since the high-tech bubble burst 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 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."

Google's online search service is favored by millions of computer users around the world, who turn to it to comb through the Internet. The company profits from the ads it displays alongside its search results. Every time a computer user clicks on one of those ads, Google receives a fee. In addition to competition from Yahoo Inc., Google disclosed that it anticipates a heightened challenge from Microsoft Corp., which is incorporating new, enhanced search functions into its widely used software for running personal computers.

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 more than $30 billion to roughly $23 billion -- a big drop but still more than double the market value of 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 approved the company's prospectus describing the revised offering yesterday at 4 p.m. Google stock will begin trading today under the ticker symbol GOOG.

One reason investors 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 prices 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 will 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 Corp. Kessler said Google will begin trading at a stock price that was about 75 times its anticipated profit per share in 2004, while Yahoo is trading at a comparable multiple of 83 times earnings.

Both Yahoo and Google will trade at premium prices compared with the traditional valuation of major corporations, which have tended to trade for around 20 times earnings. However, Kessler said that even though Google's meteoric growth has begun to slow, he is projecting that the company's profit will grow about 60 percent annually for the next three years.

"It is a rarefied air to trade at these price-to-earnings levels, but if the growth rate and the company's profitability and prospects warrant them, it is possible the shares could do quite well," Kessler said. "It all depends on how the company executes in this environment relative to its competition."

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 enabled it to sell the 19.6 million shares it is offering. Anyone who bid at or above the clearing price would be allocated shares.

Of the 19.6 million shares, the company plans to issue 14.1 million, and early investors intend to offer the remaining 5.5 million. Google may sell an additional 2.9 million investor shares.

Brin and Page, who founded the company in 1998 when they were in their mid-twenties, are each slated to sell stock in the IPO worth about $41 million. On paper, their remaining holdings will be worth about $3.2 billion each.

Even though Google is changing from being a private company to having stock that is traded publicly and owned by thousands of investors, the founders will retain control over all major decisions because they own a special class of stock.

The auction forced Google to reveal far more than it preferred in its days as a private company.

"Going through all of this has to put a lot of pressure on the Google staff," said Nate Elliot, an analyst with Jupiter Research. "It can be hard for employees to focus when the circus comes to town."

Staff writer Carrie Johnson contributed to this story.


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