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Google Launches Auction

Playboy Interview Won't Delay IPO

By David A. Vise
Washington Post Staff Writer
Saturday, August 14, 2004; Page E01

Google Inc. launched the biggest electronic auction of stock in Wall Street history yesterday but warned that it could face legal liability from a Playboy magazine interview with the company's founders that overstated some aspects of the Internet search engine's performance.

Google said it could be forced to repurchase any shares it sells in its unconventional initial public offering if a court rules that it violated a prohibition on making statements that pump up a stock during the "quiet period" before an IPO. The company took the unusual step yesterday of publicly filing a copy of the entire Playboy interview with Google founders Sergey Brin and Larry Page to the Securities and Exchange Commission, along with a list of corrections.

Google's IPO is expected to make co-founders Larry Page, left and Sergey Brin billionaires, but it may be delayed. (Ben Margot -- AP)

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A source said the SEC would not force the company to delay its IPO, which Google said it expects to price next week. Preliminary indications yesterday were that major investors bidding on Google shares were tendering bids at the lower end of the company's estimated price range of $108 to $135 per share, but neither the company nor the investment firms handling the deal released information on the nature of the bidding or when the auction would close.

The Playboy article is one of a number of uncertainties faced by investors in the unorthodox public offering. Normally, Wall Street firms play the major role in deciding how IPO shares are allocated and priced, and investors know exactly how much they are going to pay and when the money is due.

But Google has chosen to use electronic auction technology that it devised to get the highest possible price for the firm and early investors who are selling stock to the public. In the auction, investors bidding for Google shares declare the highest price they are willing to pay but have no idea when the auction will close, what other investors are bidding or how much they may be required to pay based on the limits they set.

Google has touted the virtues of its auction method as more democratic and open, and a welcome change to the abuses on Wall Street over the past few years, when favored investors received allocations of stock in hot IPOs and sold at a profit on the first day. Individuals, typically shunned by Wall Street firms in favor of major investors, can participate in this IPO by offering to buy as few as five shares, rather than the 100-share minimum that is customary in such offerings.

Google has warned that there may be a "winner's curse" as a result of the auction process -- meaning the share price could fall on the first day of trading if the blind auction succeeds in maximizing the initial price, leaving successful bidders with a paper loss on day one.

As a result of the risk and uncertainty, many investors who might otherwise be impressed with Google's robust profit are sitting on the sidelines and waiting to buy shares after the stock starts trading under the ticker symbol "GOOG" later this month.

While smaller corporations in the United States and abroad have conducted electronic auctions to sell stock in IPOs before, no deals of this magnitude have been done successfully or with so much mystery surrounding them.

"This is all taking place behind closed doors," said Scott Kessler, an analyst with Standard & Poor's Corp., adding that if the company can sell shares that would value Google at its $30 billion target, "that really means something."

Bidders in the Google auction were required to register by Thursday afternoon and open an account at one of the 28 investment firms handling the IPO. Then, the auction opened yesterday, and bidders had the opportunity to submit offers to investment firms at whatever price they chose.

Over the weekend, Google and its financial advisers will evaluate the bids submitted yesterday and decide whether to keep the auction open longer or declare it closed. Once the auction is closed, Google intends to price the IPO at a "clearing price" based on the bids that would enable it to sell at least 25.7 million shares. Those bidders offering to pay the clearing price or higher would receive an allocation of shares, while those bidding less than the clearing price would not receive stock in the IPO.

Google said it has reserved the right, in consultation with Morgan Stanley and Credit Suisse First Boston, its Wall Street advisers, to set the IPO price slightly below the clearing price to reduce the chances of a steep price drop on the first day of trading. Google also may elect to issue more than 25.7 million shares in the IPO, depending on demand.

While SEC officials decided not to delay the offering due to the Playboy interview, they set certain conditions that expose Google to potential legal and regulatory sanctions in the future, according to a person familiar with the decision who spoke on condition of anonymity because he was not authorized to speak publicly on the topic. The SEC required Google to disclose that the interview may have violated the quiet period, exposing the company to potential shareholder lawsuits. It also mandated that Google correct important inaccuracies in the Playboy article, including the overstatement of how many people visit Google's Web site daily. In addition, Google's compliance with the SEC's requests does not preclude the agency from eventually taking action against Google for violating the quiet period, the source said.

Google said in its filing that it does not believe the interview, which hit newsstands yesterday, violated restrictions on what senior company officials can say prior to an IPO. The interview took place in April, one week before Google filed papers with the SEC indicating plans to go public. A spokeswoman at Playboy said there were no restrictions on when the article could be published, adding, "We try to make our interviews as timely as possible."

Google said it would fight any shareholder lawsuit. "We would contest vigorously any claim that a violation of the Securities Act occurred," the company said in its filing with the SEC.

But Tom Taulli, author of a book on IPOs, said the interview could turn into fiasco for Google: "The SEC is reading a lot of issues of Playboy right now."

Washington Post staff writer Carrie Johnson contributed to this report.

© 2004 The Washington Post Company