Not content with being the most hotly anticipated stock offering since the early days of the Internet bubble and setting a record (at least briefly) for the highest target price in an IPO, Google now seems to be trying to set another record -- for the greatest number of screw-ups on the road to a share issue.
For a company whose prospectus was filled with obvious signs of trepidation about the whole exercise of going public in the first place, the Google gang seems to have done its best (or worst) to draw just the kind of critical scrutiny it was hoping to avoid.
If only Google had issued a billion shares a few months ago, when anticipation was at a fever pitch, it would have had enough money for decades worth of Nerf guns and free massages. Unfortunately, prospectuses have to be filed with the proper authorities and that takes time. That allowed investors to think long and hard about their desire for the stock, and gave Google a lesson in how not to arrange an IPO.
As with so many other things about Google, its prospectus was a radical departure from the traditional offering. In place of the usual dry catalogue of financial information, Google founders Sergey Brin and Larry Page indulged in a long-winded rant about capitalism and the unique nature of their company. In many ways, it was a striking mix of both arrogance and naiveté, a mix that has been seen in many of the company's dealings since the prospectus was filed.
Google's founders said their main rule was "don't be evil" -- a motherhood statement so vague as to be meaningless. For Google, it seemed to mean being fair, and yet on closer inspection there were many things about the IPO process that weren't. For example, the Dutch auction method Google chose was supposed to be more inclusive than the usual clubby Wall Street process. And yet Google went on a traditional "road show," holding closed-door meetings with brokerages and favoured clients.
Mr. Brin and Mr. Page also chose to do something that is about as unfair as it gets: They reserved the voting shares of the company for themselves and other executives, and offered investors only non-voting stock. This kind of inequity is a standard feature of many Canadian companies, but it's rare for a technology company as large and powerful as Google, let alone one that is committed to fairness.
After the prospectus was issued, the real fun started. Not only was the company criticized for overvaluing its stock with a proposed price range of between $108 (U.S.) and $135 -- which would have worked out to about 350 times earnings -- but it came to light that Google had failed to properly register 29 million common shares and options awarded to employees. The company called this an oversight and filed an amended prospectus offering to buy them back.
Within days of that gaffe came the news that the two co-founders of Google had given an interview to Playboy magazine that appeared to contravene securities regulations. Companies that are preparing a new share issue are supposed to maintain a "quiet period" in which executives don't talk publicly about their prospects.
Although Google protested that no relevant information was revealed, the company was forced to once again file amended documents that included a copy of the offending interview and corrected a few statements it admitted were "misleading." Among other things, Mr. Page said the company had about 1,000 employees when at the time of the interview Google had close to 2,000 staff.
Whether because of the negative attention over its proposed share price or the gaffes that have followed the issue, Google said yesterday that it was cutting the number of shares that would be offered and the proposed price, only a week or so after boosting the number of shares it planned to sell. In place of the previous target of 25.7 million shares at between $108 and $135 each -- which would have raised as much as $3.4-billion -- Google said it will sell 19.6 million shares at between $85 and $95 for proceeds of up to $1.9-billion.
After the Playboy interview, one fund manager told The Wall Street Journal that the incident was more evidence of the "lack of adult supervision" at the on-line company, and he has a point. Google's founders seem to have been swayed by all the people telling them how hot their company is. As a result, they have tried to bend the process of going public to match their view of how things should work, rather than following the usual process like everyone else, and that has led them astray. Whether it will hurt the prospects for the stock remains to be seen.
A bit of advice for Google: If you don't want to play by the rules and face the scrutiny of the public markets, the solution is simple -- don't go public. If you do, you can either get it right or take your lumps.
Mathew Ingram writes analysis and commentary for globeandmail.com.