Thursday, August 19, 2004

Internet search engine Google has announced it will go public at $85 a share, paving the way for the widely awaited but troubled stock offering to finally stumble to market on Thursday.

At that price, the low end of its recently revised range, Google raised $1.67 billion, with $1.2 billion to go to the No. 1 Internet search engine and $473 million to Google executives and investors selling their shares.

The Securities and Exchange Commission gave the final go-ahead for an initial public offering Wednesday afternoon, clearing the way for trading in Google stock to begin Thursday.

Earlier in the day, the company slashed its planned IPO by nearly half, cutting the expected price to $85 to $95 a share from its original range of $108 to $135 a share. It later confirmed its initial going-public price would be $85 a share.

The Mountain View, Calif.-based company also cut the size of the sale to 19.6 million shares. But it was uncertain whether the lower price would be enough to attract more investors once the stock begins trading, said Wane Shaw, a professor with the SMU Cox School of Business.

Shaw, who has studied the behavior of IPOs, said Google would have been better off doing a stock split before the offering. For example, the company could have increased the total number of shares outstanding four times and cut the per share price: Instead of a range of $85 to $95, it would have been $21.25 to $23.75 -- a price range more in line with a typical IPO.

"The auction has eliminated so many investors from the process," Shaw said.

It's been a long, strange trip for Google since the company filed to go public in April.

Investors initially waxed rhapsodic about Google's IPO -- the most widely awaited since the dot-com boom went bust -- based on its position in the lucrative search-based advertising market and its impressive sales and earnings growth.

But the euphoria did not last long. Many potential investors were put off by the company's decision to use the so-called Dutch auction process to sell its shares.

Google has also been plagued by a number of legal snafus during the IPO process. It warned that it may have violated securities laws by failing to properly register shares and options it awarded to current and former employees. And the SEC also has scrutinized an interview that the company's co-founders gave to Playboy a week before the IPO filing.

The company's timing isn't ideal either. Tech stocks have tumbled this summer, despite their recent mini-rally, on concerns that profit growth may have peaked. Internet stocks have been hit especially hard due to questions about extremely high valuations.

Although techs have rallied the past few days, Brian Bolan, an analyst with Marquis Investment Research, said he does not expect Google's stock to pop on its first day of trading. What's more, he's not ruling out a slight drop.

"I would not be stunned if Google closes down. Internet search companies have been through the ringer for the past few weeks. A couple of up days don't make a trend. There isn't a full-throttle conviction behind this market," said Bolan.

He added that Google's price cut doesn't necessarily make it more attractive -- it just brings the shares more in line with their competitors. When Google first disclosed its preliminary price range last month, some investors scoffed at the company's potential market value of $33 billion.

But based on the midpoint of Wednesday's revised range, Google now would be worth about $24 billion. Top rival Yahoo!, by way of comparison, has a market value of about $39 billion. Most analysts have argued that Yahoo! should trade at a premium to Google since it is a more diversified company.

"To see a market capitalization valuing Google as a mature company is assuming a best-case scenario which isn't a for-sure outcome. It still has a long way to go to justify growing into that kind of market value," said Michael Cohen, director of research with Pacific American Securities.

In addition to Yahoo!, Cohen said, Google will face increased pressure from Microsoft, which has been stepping up its research and development efforts in its MSN Internet business.

"This long saga is about to come to a close, but in many ways it's the beginning of another saga, which is how will the company will do competitively?" said Cohen.