Google on Wednesday reduced the price range for its long-awaited initial public offering to between $85 and $95 per share, and lowered the number of shares being sold by company executives.
The changes cut the value of the company by almost 30 percent—to $25.8 billion—compared with the high end of its initial pricing range of $108 to $135 a share.
The initial range was considered high by typical IPO standards.
"As far as I'm concerned, it wasn't priced low enough," said David Menlow, president of IPO Financial Network.
Google and selling shareholders now stand to raise as much as $1.9 billion by offering 5.5 million shares. That's down from the $3.5 billion they would have raised had they gone out with initial plans to sell 11.6 million shares.
And some insiders, including well-known investors John Doerr and Michael Moritz, have been cut out of the IPO entirely.
The company has asked the Securities and Exchange Commission to make its registration statement effective as of 1 p.m. Pacific time on Wednesday. That could have the company trading publicly as early as Thursday.
Google priced the shares in a rare auction-style IPO. The deal promised to put more shares in the hands of ordinary investors rather than wealthy investment banking clients. The auction was also widely seen as a slap at Wall Street and the clubby culture that contributed to 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 auction started, 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.
In addition, Google faced growing skepticism from institutional investors over a lackluster "road show" presentation and from 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.
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Technology companies this year averaged first-day gains of 14 percent with their IPOs, while first-day gains for all IPOs averaged about 10 percent. 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 in the aftermarket.
Despite predictions that the share price will dip, some IPO experts said the deal could yet spark a surprise rally in technology stocks if investors drive up the price.
"If the stock trades down, people will say they expected that," said Richard Peterson, an IPO analyst with Thomson Financial Services. "But if it does well and gains 20 percent in the first day, it may give some issuers a reason to be optimistic for the balance of the quarter...and that upside may be a welcome surprise that can only help, not hurt, the market."
Times have changed
Problems aren't uncommon on the road to an IPO, 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 of 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. Its Prius-driving founders seemed to many 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, Google 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 in 2001 with the DejaNews' Usenet archives acquisition to shopping search.
Its 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, on the heels of the commercial success of GoTo with the same type of system. Google's ad service differed from those 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.
Google was not only able to make these strides, but also 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 Yahoo and Microsoft. 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 1GB 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 do battle with competitors. This year, it began working on new local search and personalization services. The company will likely also 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 has also set its sights on desktop search.