August 18, 2004 2:55 PM PDT

Weak demand behind Google price cut

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Google's decision to cut back its public offering by as much as 30 percent represents a stinging rebuke for a deal once heralded as a surefire windfall not only for the company but for the technology industry at large.

Analysts said the writing has been on the wall for days, as it became apparent that investors were not signing up for the stock auction at the right price and in sufficient numbers to float the massive offering.

"The simple explanation (for the cut) is a matter of supply and demand," said Richard Peterson, market strategist for Thomson Financial, a financial data provider. "The initial level they expected wasn't sustainable."


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On Wednesday, the Mountain View, Calif.-based company lowered its per-share price range from $108 to $135 to between $85 and $95. The change cut the value of the company by almost 30 percent--to $25.8 billion.

Later in the day, the Securities and Exchange Commission gave Google's IPO the green light to proceed. Shares could begin trading as soon as Thursday.

However, the company's repricing of its share range takes the IPO value down considerably, from near the top 10 of all-time offerings to just below the top 25. Google now expects to raise about $1.9 billion, as opposed to between $2.7 billion and $3.3 billion.

In the eyes of many investors, Google had made a host of missteps before its IPO. With its unconventional Dutch auction offering, it alienated some traditional bankers, which are used to taking the reins in setting the IPO price and marketing the deal to big institutional investors. Undermining their power, Google sought to democratize the system by allowing investors to bid for shares, but it has faced weak demand based on a host of factors.

 "The technique hasn't been embraced by Wall Street," Peterson said.

Stock analysts also said Google's original price range may have put off many people, because shares in the triple-digits often carry a psychological barrier for average investors. That's why, they say, companies often perform a stock split once shares begin trading above $100.

"Investors don't like the concept of trading these high-priced stocks," said David Menlow, an analyst at IPO Financial Network. "That's why there's the concept of the stock split--to put it within reach of individual investors."

Only about 11 public offerings have ended the day above $100, and many have not added to their gains, Peterson said. Palm and WebMethods are in this club.

Also, some financial analysts have expressed concerns about shares flooding the market and pushing down the price, with employees' ability to sell shares within a short period after opening day. Unlike typical lock-up periods of 180 days, some insiders could sell 30 days, 60 days and 90 days after the deal prices.

A low start
Another contributing factor could be the soft market for IPOs in general. In August alone, 10 of 17 public offerings came in below their initial asking price range, according to Thomson Financial. For the year, more than a third of the 147 IPOs had a price reduction, and 79 are trading below their opening price. Peterson added that the last time IPOs turned in such a poor showing was in the period preceding April 2000--the height of the dot-com bubble.

Technology stocks also are waning. The Nasdaq is down roughly 10 percent since the end of the second quarter.

Google investors may not benefit much from a lower opening price, however. For companies that priced shares below their initial range, the average stock gain was 4 percent on the first day of trading, according to Thomson Financial. But for the few companies that priced shares above their initial range, they gained between 17 percent and 20 percent on the first day.

Although Google has faced a number of challenges with its IPO, one thing it doesn't have to worry about is re-registering its shares because it lowered the offering beyond a 20 percent threshold. That's because the SEC hadn't officially registered its shares until Wednesday.

"Companies typically drop the price first to get the deal done. But dropping both the price and the size is a greater sign of weakness," said one investment banker who asked to remain anonymous.

He added that rarely do investors see only the number of the shares, otherwise known as deal size, lowered.

"If they dropped the size of the deal massively, then that could affect the liquidity of the stock and its trading," the banker said.

CNET News.com's Dawn Kawamoto contributed to this report.

 

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