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Filter - Cynthia L. Webb
Google Loses an Underwriter


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By Cynthia L. Webb Staff Writer
Tuesday, June 22, 2004; 9:36 AM

Everything about Google's upcoming public stock offering is mammoth, from the $2.7 billion price tag to the anticipation surrounding the event. Add to that list the bevy of Wall Street firms Google has retained as financial midwives.

Google hired 31 companies to assist in the IPO, though one, Merrill Lynch & Co. is no longer on the list, according to a filing Google made with the Securities and Exchange Commission. "Google dealt another blow to the Wall Street underwriting establishment as it revealed that it had dropped Merrill Lynch from the syndicate of banks behind its forthcoming initial public offering," The Financial Times reported. The move is "the latest in a string of decisions that have marked out Google's IPO as the biggest challenge ever mounted to Wall Street's traditional way of handling stock sales."

The Times wrote that "Bankers involved in the stock sale were warned early on by Google that they would be dropped from the underwriting group if they leaked any information about the transaction," conveniently adding afterward that "No explanation was available about why Merrill had been dropped from the list."

From The Wall Street Journal: "People familiar with the situation said Merrill was reluctant to make the large technology investment needed to handle the coming IPO, particularly when investment banks are expected to reap slim fees for the deal. The final fee structure hasn't been set but is expected to be somewhat smaller than usual, these people said."

And from the Times of London: "Merrill Lynch declined to comment on why Google decided to dispense with its services for such a big deal. A Wall Street source close to the float said that the bank was either unwilling or unable to spend the millions of dollars required to update its computer systems to meet the unusual demands of the Google IPO. 'Their IT system needs remediating to carry out the work needed for the IPO,' the source said. 'It seems Merrill cannot meet that challenge.' Merrill Lynch declined to comment. A source close to Merrill said: 'It is not that Merrill cannot provide the IT system. It is a matter of cost. If it costs a million and you stand to make $200,000 why bother,'" the paper reported.

The paper said that the banks could end up divvying up as much as $100 million in fees when Google goes public.

Despite Merrill's absence, The Wall Street Journal said: "Individual investors still will have plenty of investment banks to choose from when making their bid. Citigroup Inc., which also has a large retail base, is on the underwriting list. Other companies devoted to nonprofessional investors also are involved, including Ameritrade Inc. and E*Trade Securities LLC," the paper said.
The Financial Times: Google Drops Merrill From IPO List
The Wall Street Journal: Google Deletes Merrill Lynch From List of IPO Underwriters (Subscription required)
The Times of London: Merrill Out of Google Float
Google's SEC filing

And with its revised prospectus, Google appears to be getting more humble. The New York Times noted the revisions likely stemmed from comments from SEC staff. The revised document stated "even more pointedly that the unusual auction process for its initial stock sale could cause its shares to fall after the offering. 'If your objective is to make a short-term profit by selling the shares you purchase in the offering shortly after trading begins, you should not submit a bid in the auction.'"

The revised prospectus still contains the letter from co-founders Larry Page and Sergey Brin, The Times said. "The letter keeps its jab at Wall Street analysts, noting that companies that try to manage their earnings to be consistent with analysts' forecasts 'often accept smaller, predictable earnings rather than larger and less predictable returns.' But the risks section of the prospectus now warns that analysts may still have the power to affect the stock's price. It notes that because of the auction process, the initial price 'may have little or no relationship to the price determined using traditional valuation methods.' So when analysts start to cover Google's stock, presumably using those traditional methods, they may publish target prices far below the offering price, possibly causing the price to decline," the paper said.
The New York Times: Google Edits Its Prospectus To Highlight Risk of Loss (Registration required)

Bloomberg reminded readers "Google hired Morgan Stanley, Credit Suisse First Boston and 28 other securities firms to run a sale that gives the public an opportunity to bid for stock by phone, fax or the Internet." The New York Daily News described more on Google's plans for a so-called dutch auction of its stock. Google said in its filing that "it will let investors cash in on what's expected to be the hottest initial offering of the decade for as few as five shares. The unusual auction process will give small-time investors a much better chance of snagging a share in the company behind the world's most-used Web search engine."

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