Wednesday, August 18, 2004

The trials and tribulations of the Google IPO

Sooner or later the Google IPO will be completed, but in the mean time we can all take solace in the fact that it will provide class room material to FinanceProfessors for years to come. Almost every day the firm is giving us a great example for teaching!

Friday-- we learned that Google's founders had done an interview in playboy. This caused some problems as many feared it would violate the SEC's Quiet Period. Interestingly, the interview was done before the firm had filed for its IPO, but the publication came out after the filing and during the quiet period.

As I am sure many of you were looking forward to reading the interview, but didn't want to buy the magazine because of the pictures (right? ;-) ) , here is the interview sans pictures.

Tuesday's problem was that that SEC temporarily withheld its approval pending further investigation into how the firm "distributed stock to employees." Reportedly the firm did not properly register these shares. A fact that may lead to fines down the road.

Today (Wednesday) the NY Times reports that Google is cutting the price by about 25% (from an original price range of $108 to $135 to between $85 and $95 a share. This lowers the value of the firm to just under $26 billion--which no so coincidentally is more in line with what the NY Times said that analysts had priced the firm at in the first place).

The lower price is also causing some of the insiders who had planned on selling their shares to reconsider.
Thus, there will be fewer shares sold. The new estimate is about 19.6 million shares to be sold (down from almost 26 million). As an aside, insiders who already own shares often sell at the same time as the IPO. This lowers the transaction costs of the deal since share offerings have a large fixed cost component. Moreover, generally there is a lock-up period after the IPO where the insiders are not allowed to sell.

Is Google to blame? To a degree, but definitely not completely. For instance the timing of the Playboy interview was not the firm's fault. While the firm may have been overly optimistic in setting the price range of the shares, pricing securities is difficult and lowering valuations is not that uncommon. More than likely the firm's insistence on a rather unique IPO process (Dutch Auction) and the attempts to leave less on the table and to allow all investors to participate have led to some of the problems just because it is something different.

Perhaps Arthur Levitt (former SEC chairman) wraps it up best in Bloomberg:

"Google has been hit by the perfect storm. What's occurred is a meltdown in
technology stocks, an incredibly complicated way of handling a good new [IPO]
process, and maybe most significantly the firms sponsoring the Google offering
have been so spooked by over-regulation. Google has been a victim, actually, of
all these events.''


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