August 18, 2004 6:15 PM PDT

Google to go for $85 per share

Google set its long-awaited initial public offering at $85 a share on Wednesday, enduring a series of hurdles to come in at the low end of its recently lowered pricing range.

The search engine giant will begin trading Thursday under the ticker symbol "GOOG."

The IPO price fell far short of its initial range of $108 to $135 a share, but scored within the Web search giant's revised pricing range of $85 to $95 a share, announced Wednesday.


Special coverage
Clouds over Google's IPO
Problems add up as market
debut draws near.


"The stock is now in the ballpark of being the right price," said Tom Wyman, a portfolio manager with Husic Capital Management. "At this level, it's about a 20 percent discount to Yahoo's valuation, which is proper, given Yahoo has a diversified revenue stream and Google is a one-trick pony; Yahoo has one class of shares and Google has two; and Yahoo gives financial guidance of how it will do next year and Google gives no guidance."

Google and selling shareholders raised $1.66 billion by floating out 19.6 million shares in a rare Dutch auction-style IPO. The deal promised to put more shares in the hands of ordinary investors rather than of wealthy investment banking clients. It was also widely seen as a slap at Wall Street and the clubby culture that contributed to recent investigations into improper IPO trading activities at the height of the dot-com bubble.

But Google's revolution faced some problems of its own.

Just days before the IPO, Google announced that the Securities and Exchange Commission and state regulators had begun an informal inquiry into how it issued stock options to some insiders. Then, a high-profile interview with the founders appeared in Playboy magazine, threatening to delay the deal.

Despite those clouds, the SEC green-lighted the deal late Wednesday.

In addition to regulatory problems, Google faced growing skepticism from institutional investors over a lackluster "road show" presentation and deal terms that seemed geared toward enriching insiders rather than new investors.

Under an auction format, the highest price that results in all shares sold receives IPO shares. Because the format relies on the highest bid, it can, in some cases, temper what would otherwise be a large surge in price once the IPO shares begin trading on the open market.

Technology companies this year averaged first-day gains of 14 percent with their public offerings, while gains for all IPOs averaged about 10 percent on their initial day of trading. But a number of Wall Street observers said they expect Google's share price will trade down once it hits the market.

That means the people who stand to get the most from the deal are those selling shares in the IPO itself, rather than the aftermarket. And, in an unusual twist, more than a fifth of the money raised in the Google IPO will go immediately to insiders, including the company's two founders and chief executive.

Google insiders and the company's venture capital backers had originally planned to unload twice as many shares, but several sellers cut back when the company reset its price range Wednesday.

CEO Eric Schmidt and co-founders Sergey Brin and Larry Page reduced their planned sales by half. VC firms Kleiner Perkins Caufield & Byers and Sequoia Capital had at first planned to sell more than 2 million shares each as part of the IPO, but ultimately sold none.

Despite predictions that the share price will dip once the stock starts trading, some IPO experts said the deal could still spark a surprise rally in technology stocks if investors drive up the price.

Times have changed
Problems aren't uncommon on the road to a public offering, but Google's may have been magnified because of inordinately high expectations surrounding the deal. Long before the company filed its IPO documents with the SEC, Google's founders and management were frequently peppered with questions about when the search company would go public.

Google's mystique was fueled by an iconoclastic culture that included a mantra to "Do no evil," free gourmet meals for staff, and a revulsion toward motives of pure profit. To many, its Prius-driving founders seemed to embody all the principles of enlightened scientific consciousness. And its technology worked like no other.

Using a mathematical formula called PageRank, Google analyzes hyperlinks of Web pages to measure popularity relative to similar pages. That would eventually thrust Google ahead of the pack in delivering relevant search results in Web pages.

Google also kept itself sparse and focused. While other search engines were obsessed in "portalizing" their sites and making them "sticky" in the late 1990s, Google stayed focused on serving search results on the Web.

On this backdrop, the company got its first big break when Yahoo licensed its search technology in 2000, snubbing Yahoo's then-partner Inktomi. Google's star rose quickly afterward as people began to migrate to the source of their search results.

Since then, Google has continually introduced new categories of search services over the years, from newsgroups--with the DejaNews' Usenet archives acquisition in 2001--to shopping search.

The company's most important developments relate to online advertising, which comprises 95 percent of its $1 billion revenue. In 2001, the company introduced a pay-per-click advertising system that lets marketers bid for placement adjacent to search results. The move came on the heels of the commercial success of GoTo with the same type of system. Google's ad service differed from that of GoTo--now Yahoo-owned Overture Services--in that it takes into account how often people click on a marketer's text ads in order to determine its placement in sponsored listings.

Google later syndicated the ad program in 2002, allowing companies such as America Online and Ask Jeeves to display its search-related advertisements and share in the profits. With this move, Google and Overture became heated rivals for ad-distribution partners. In 2003, Google introduced contextually based advertising that allows publishers to display text ads related to their content as opposed to search.

From the bottom up
Google was not only able to make these strides, but did so without the benefit of a stockpile of cash from an IPO. Analysts said the company will likely stick to its roots after the IPO and apply the money to parts of its existing business.

"They are a company that builds things from the bottom up. Also, Yahoo has already bought a lot of the assets out there," said Jim Friedland, an analyst with S.G. Cowen. "I think Google will spend more of its IPO money on marketing and R&D, which is a trend that has already started."

With success have come challenges.

Google has drawn many lawsuits, including complaints that its ad program violates company trademarks. The company only recently settled a long-running lawsuit with Yahoo over patent infringement, and Google expects to take a charge of between $260 million and $290 million in the third quarter.

The company also has a whale of a fight coming from rivals Microsoft and Yahoo. Microsoft's MSN is planning to introduce new search tools next year and eventually plans to make navigating seamless for the Windows operating system, the Web, e-mail and desktop documents.

And recently, researchers conducted studies showing that Google results don't necessarily outperform rivals such as Yahoo or Ask Jeeves' Teoma, but that its "brand halo" tends to sway Web surfers nevertheless.

This year, Google also introduced Gmail, a free Web-based e-mail service with 1 gigabyte of storage. The e-mail service was designed to set it apart from the pack. But as Google noted in an SEC filing this month, its competitors are catching up in offering storage.

Google is developing other new services to battle competitors. This year, it began working on new local search and personalization services. In addition, the company will likely introduce a searchable book service in the coming year or two, given that it has already started copying and indexing some publishers' works. The company also has set its sights on desktop search.

 

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