Six-year-old Google Inc. put a price tag on its initial public share offering Monday, valuing itself at a cool $29-billion to $36-billion (U.S.), but the founders are taking extraordinary steps to ensure that no one gets rich flipping the stock in the most anticipated Internet IPO in years.
In the latest example of how Google is turning the investing process on its ear, the Mountain View, Calif.-based company warned investors not to expect to be able to sell their shares for a profit in the near term. Google is using an unconventional electronic auction process to price and sell its stock directly to investors rather than to a select group of investment bankers and insiders.
As part of the process, interested investors must log on to a Google website and register to bid in advance of the offering. In a filing with the U.S. Securities and Exchange Commission Monday, the company warned it will reject bids that it decides "have the potential to manipulate or disrupt the bidding process."
In Canada, investors don't have access to the auction as the stock is made available only through private placement, a method that exempts the company and the selling stockholders from filing a prospectus with regulatory authorities.
The company has taken unusual steps to try to preserve a number of principles the company's co-founders have set out (which includes the mantra "Don't Be Evil"). Google says it will not provide regular earnings guidance and will forgo quarterly stability in favour of pursuing long-term strategies.
Several large underwriters have recently taken the uncommon step of pulling out of the IPO process, walking away from a deal expected to generate about $90-million in fees. The U.S. securities subsidiary of Royal Bank of Canada, and SunTrust Robinson Humphrey were the latest underwriters to pull out, at a time when IPO business is slow on Wall Street. Merrill Lynch & Co. removed itself from the process last month.
"The fees are pretty thin," complained one industry source, who asked not to be identified. The auction process removes the selling concession usually set aside for the brokers who distribute regular IPO shares, he said.
The combination of lower-than-normal fees and the risk associated with the uncertainty about how the market will respond to Google has made the deal unattractive for some investment firms. In addition, some firms don't want to deal with partial blocks that will likely emerge from the pricing structure, the source said.
In its filing, Google set a price range of between $108 and $135 a share. Companies normally split their shares before they reach that price to make it easier for retail investors to buy in blocks of 100 shares. Google has set the minimum size of any bid at five shares.
Despite the unusual nature of Google's offering, there are still 28 firms listed as part of underwriting, led by Morgan Stanley and Credit Suisse First Boston. Google said several shareholders and the company expect to sell 24.6 million shares, valuing the initial public offering between $2.7-billion and $3.3-billion. At that price, the company would be worth almost as much as rival, Yahoo Inc., and possibly more than such corporate stalwarts as Ford Motor Co. Ltd. or McDonald's Corp.
Co-founders Sergey Brin, 30, and Larry Page, who abandoned PhD studies at Stanford University to launch their company, plan to sell a sliver of their holdings as part of the IPO and could pocket as much as $130-million based on Monday's filing.
In Monday's prospectus, however, they warned investors not to expect immediate big gains. "As part of this auction process, we are attempting to assess the market demand for our class A common stock and to set the size and price to the public of this offering to meet that demand. As a result, buyers should not expect to be able to sell their shares for a profit shortly after our class A common stock begins trading."
The class A shares carry one vote each, while the class B stock, already held by employees and early investors, will each have 10 votes. Google said this dual-class voting structure will give Mr. Brin and Mr. Page strategic control of the company.
Google said it expects to raise $1.7-billion from the public offering. The funds will be used for general corporate purposes, including working capital and possibly acquisitions. The company said it does not expect to pay any dividends "in the foreseeable future."
Unlike many of the Internet IPOs that preceded it, Google has been profitable for several years. It said Monday that second-quarter profit rose to $79.1-million from $64-million in the first quarter. Revenue climbed 7.5 per cent to $700.2-million from $651.6-million.
Google's proprietary algorithms allow its search engine to scan almost 4.3 billion Web pages instantly.
Worm hurts Google
An Internet worm, a variant of the MyDoom virus that uses Web search engines to find new victims, caused outages on Google's search site in the United States, France and the United Kingdom Monday. In many places the site was said to be working normally.
"The latest version of MyDoom, which started arriving in people's mail boxes in force today, uses search engines to find more recipients for its message," security research service SANS reported Monday. "Some search engines report performance issues."
Website performance slowed broadly Monday, suggesting the possibility that a virus or other Internet attack may be causing problems, said Keynote Systems Inc., a Web performance-tracking firm.
"It could be an indication that something is impacting the Internet over all. We are certainly looking into it and also looking into the possibility of some sort of attack. We are starting to see things creep up," spokeswoman Della Lowe said.
Largest initial public offerings
As much as $3.3-billion (U.S.) in Google stock could be sold at the company's IPO, jaking it the eighth largest in U.S. history.
ISSUER....................................DATE...........AMOUNT (in billions U.S.)
AT&T Wireless Group.........April 26, 2000.....$10.6
Kraft Foods Inc................... June 12, 2001.......8.7
UPS.....................................Nov. 9, 1999.........5.5
Citigroup Inc......................... .July 1, 2002..........4.6
Conoco..................................Oct. 21, 1998........4.4
Travelers Property Casualty Corp...March 21, 2002.....3.9
Agere Systems Inc..........................March 27, 2001.....3.6
Google....................................Expected 2004......3.3
Charter Cmctns. Inc.................Nov. 8, 1999........3.2
Goldman Sachs Group Inc..............May 3, 1999.........3.2
NOTE: Does not include overallotments.
SOURCE: THOMSON FINANCIAL