By Ben Elgin After five-plus years of largely glowing coverage from the press, Google and its executives must feel like they've entered a shooting gallery. Once billed as the initial public offering of the decade, Google's bid to go public has been hampered of late by missteps, downbeat press reports, and a suddenly grisly market.
The latest monkey wrench came on Aug. 5 when the California Corporations Dept. announced that it's investigating Google for not registering over 23 million shares of stock it doled out to employees and consultants. Although analysts and securities attorneys don't view this as a major hurdle, it adds another layer of perplexity to investors who are considering purchasing Google's IPO shares. Here's an assessment of the issues and likely outcome:
Why are some investors increasingly wary of Google's stock?
It will be impossible to know exactly how the investing public feels until Google commences its auction process, which may occur as soon as early next week. But a number of institutional investors BusinessWeek Online interviewed are less than enthused about buying into the IPO. For starters, the overall market has dimmed in recent months. The Nasdaq exchange, where Google plans to list its stock, has plunged 10% since July 1. In addition, 61% of the companies that have gone public in 2004 are currently trading below their initial offering price, according to IPO Central.
There are some Google-specific reasons for concern as well. Recent slip ups, such as the aforementioned securities-law violations and the recent disclosure that the search engine's top lawyer, David Drummond, is the subject of a Securities & Exchange Commission accounting probe from his time as CFO of software maker SmartForce, have scrubbed off some of its luster. Google, meanwhile, recently estimated its nosebleed valuation to be from $29 billion to $36 billion, giving it a multiple near more seasoned competitor Yahoo! (YHOO).
On top of this, Google's efforts to sell its shares through an unorthodox auction process, which opens up bidding to the public and sets the price for the IPO, attempts to limit the stock's "pop" or rise after it begins trading. The basic idea: By opening up IPO shares to the broader investing public, the actual offering price should be closer to true demand. This limits the downside for investors who may wait to purchase stock until after it begins trading. "We probably won't bid [on the IPO]," says Kevin Landis, chief investment officer at Firsthand Funds, a San Jose (Calif.)-based institutional investor. "But later that same week, we could go right in and buy it."
Could the securities violations imperil Google's IPO?
That's unlikely, according to analysts and securities attorneys. Google goofed by allocating to employees and consultants over 23 million shares of stock that were not properly registered. It's embarrassing and raises legitimate concerns over how this company is run. But it's probably not going to raise significant regulatory roadblocks beyond possibly a small delay of the IPO, say securities attorneys.
To rectify the situation, Google has proposed a stock-buyback offer, dubbed a "rescission offer," which lets existing shareholders buy back the improperly issued stock. Since most of this stock was purchased for 30 cents to $80 per share -- well below the anticipated $108 to $135 per share expected to be fetched during the IPO -- most eligible shareholders will likely decline the buyback offer. Even if they don't, the maximum hit to Google's pocketbook would be about $25 million, just a fraction of its existing cash-on-hand.
Beyond the embarrassment and tiny financial dent, the other minor fallout could be timing. The California Corporations Dept. is investigating the matter but declined to offer a timeline for its probe. Meanwhile, the SEC also is likely to scrutinize the buyback offer, if only because Google's IPO process may be looked at as a template for many others. Even so, most experts don't anticipate this causing a significant delay beyond two weeks or more. "This isn't particularly unusual," says Lance Kawesch, a Boston-based securities lawyer and partner with law firm Duane Morris. "I don't believe that there would be any inordinate delay...because the filing contains a good deal of disclosure about the company that's already on file with the SEC."
When will the search engine finally go public?
In its IPO paperwork, Google has only mentioned "August," regarding the timing of its offering. Reports had surfaced that Google would begin trading as early as next week, but that doesn't appear likely as it works out kinks with its banks to facilitate the auction process. Assuming investors can start making their bids by early next week, it would likely take at least another week to run this process and allocate shares. That would push the offering out until the week of Aug. 16.
If Google's proposed rescission offer stirs up additional scrutiny from the SEC or the California Corporations Dept., it could push things out at least another week beyond that. But with the search engine striving hard to get this deal done, the chances of its IPO slipping beyond August are very slim. Elgin is a BusinessWeek correspondent in Silicon Valley