Shares of Google Inc. surged from $85 to just over $100 a share on the Internet search engine's first day of trading yesterday, as investor enthusiasm restored a positive glow to an image battered by negative news stemming from the IPO process.
While Google had warned that the novel electronic auction it used to distribute shares could lead to volatility and a steep price drop on the first day of trading, the company's shares did just the opposite, soaring $15 a share to begin trading at $100.01 and then stabilizing for the rest of the session.
"There is a sense of excitement and relief from the folks I've talked to at Google," said Francis Gaskins, president of IPO Desktop, which tracks initial public offerings.
The path ultimately taken by Google was not what founders Sergey Brin and Larry Page said they had in mind when they chose to use the unconventional auction method for the $1.8 billion IPO. They had hoped to set the highest possible price to benefit the company and its early investors as much as possible.
Instead, after a groundswell of adverse publicity accompanied the six-year-old firm's difficult journey from private to public ownership, the decision was made to sell fewer shares and price them more cheaply. That decision helped set an upbeat tone for the search engine's debut by setting the stage for a rise in price. However, it also meant that the company let more than $100 million in potential proceeds slip away, money that it could have pocketed itself if it had priced the IPO $10 per share higher and issued more shares.
"The biggest lesson is that to be a public company, there is some humility required and the realization that everybody has to win, which includes investors and others helping facilitate the process," said Michael T. Moe, chief executive of ThinkEquity Partners LLC.
At its closing price yesterday of $100.33 per share, Google's total stock market value soared to about $27.2 billion, making the company more valuable than General Motors Corp., Ford Motor Co., Starbucks Corp. and Amazon.com Inc., according to Financial Content Inc., a provider of data about public companies. It is worth slightly less than Yahoo Inc., its chief competitor, and substantially less than Hewlett Packard Co. and eBay Inc. Microsoft Corp., which Google has identified as its most formidable new competitor in the business of searching for information on the Internet, has a stock market value of $294.2 billion.
Moe and other financial experts said the IPO did achieve one major goal that the company had hoped for: a more democratic allocation of shares. Rather than leaving decisions about who would get stock in the IPO to Wall Street investment houses, Google relied on proprietary auction technology to allocate the stock more anonymously.
The heavy trading volume of 22.4 million shares yesterday suggested that another of Google's goals -- preventing people from buying in the IPO and flipping shares for a quick profit on the first day -- was not achieved. The stock was driven higher in early trading, experts said, by foreign investors, who were not allowed to participate in the IPO auction but wanted to own Google, and by bargain hunters attracted to Google shares at prices far below the original estimated IPO price.
For all the talk of an innovative auction method, the ultimate result was that Google, its venture capital investors and its financial advisers chose to price the stock in the time-honored tradition of Wall Street, where IPO shares in major deals often are intentionally discounted so that they will rise in price on the first day of trading.
That strategy was deemed important by two major Google venture capital backers, Kleiner Perkins Caufield & Byers and Sequoia Capital, according to people familiar with the deal. The two firms had pushed hardest for a public offering, but when insufficient demand developed at Google's initial price range of $108 to $135 per share earlier this week, the firms bailed the deal out by deciding not to sell any of the millions of shares of Google stock they had originally planned to put on the market. Their decision had a positive impact on the psychology of the offering, since investors were suspicious that heavy selling in the IPO by sophisticated insiders signaled a lack of confidence in the company's financial prospects.
There was more than altruism at work in that decision. Kleiner Perkins, Sequoia Capital and others who owned Google shares and stock options prior to the IPO will become eligible over the next six months to sell more than 200 million additional Google shares. As a result, the firms had a tremendous financial stake in establishing a positive feeling toward the stock offering among major institutional investors and the investing public, whom they will look to again in the coming months to gobble up additional shares.
Gaskins said Google executives and the company's financial advisers, Morgan Stanley and Credit Suisse Group, chose to allocate and price shares to meet only 75 percent of the demand in the IPO auction, intentionally leaving some investors hungry to snap up more stock once the shares began trading. Gaskins said that, based on his own analysis of profits and share prices, Google, at about $100, is now trading at the same valuation level as its chief competitor, Yahoo.
A handful of trades were executed by mistake with prices soaring as high as $140.92 per share before Google stock officially began changing hands yesterday in the late morning. A spokeswoman for the Nasdaq Stock Market said those mistaken trades were canceled, adding that such errors can happen in large IPOs as thousands of investors and brokers seek to match supply and demand in an orderly fashion. "We took them off the tape," Bethany Sherman, a spokeswoman for Nasdaq, said of the erroneous trades.
At yesterday's closing stock price, Brin and Page are each worth $3.8 billion, and Google's chief executive officer, Eric E. Schmidt, is worth $1.4 billion.
"It has been a good day for Google," said Jupiter Research analyst Nate Elliott. "Despite all the problems and all the potential issues that could have sidetracked them, they went public and made a lot of money for the company and early investors, and the stock price went up. And Google, being Google, made sure they did it like no one ever had."