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My Google Grubstake

By Timothy J. Mullaney When Linda Killian became a portfolio manager, she never thought she'd be sending her minions out to 7-Eleven to snag a copy of Playboy. But that's what the co-manager of IPO Plus Aftermarket Fund ended up doing Friday, as word spread of the magazine's interview with Google co-founders Larry Page and Sergey Brin.

Killian and thousands of other investors have spent months dissecting the search giant's prospects in advance of its hotly anticipated initial public offering, debating everything from mighty Microsoft's (MSFT) intentions for the search market to whether Google's "Don't Be Evil" motto was a tad pretentious. Now, the Page-Brin interview had the potential to rattle the IPO's odds one more time.

BIG QUESTIONS. Would the Securities & Exchange Commission rule that Google had violated quiet-period rules for securities offerings? Would the IPO be delayed? Like the men's magazine or not, Playboy was a must-read.

Such was the backdrop as Google opened the bidding -- yes, on Friday the 13th -- for its unusual IPO. It's planning to sell more than 25 million shares in a Dutch auction conducted over the Internet. It works like this: Investors will submit secret bids for shares, and the lowest price at which investors are willing to buy the whole lot will be what everyone and anyone pays for stock. Google has estimated the price range at between $108 and $135 per share, and it has retained the right to simply yank the offering if it doesn't get a price it likes.

Now, into this heated debate I wade. Armed with a fistful of dollars from BusinessWeek Online, as well as carefully supervised dispensation from our usual policy banning the trading of stock in companies we cover, I've been sent forth into the shadow of the valley of disinformation to bid on Google. Over the duration of the auction, I plan to supply regular insights into how this closely watched auction is playing out. After it closes, I'll sell BusinessWeek Online's shares to avoid any conflicts of interest.

TWO PROBLEMS. Why do we think this is so important? Because Google is trying to do much more than simply sell its stock to the public. Its founders have said their goal is nothing less than to spark fundamental change in the entire IPO process.

Typically, investment banks take companies public by selling their stock to investors, mostly institutions like mutual funds and insurance companies, at a discount of about 15% to what the banks estimate as fair market value. The investment banks argue that such a discount is necessary so that investors will buy the shares. But the companies going public end up with 15% less in their coffers than they would otherwise get.

Google thinks Dutch auctions can solve two IPO problems at once: Companies don't get shortchanged, and the process is more democratic because individual investors get just as much chance to buy shares as, say, Fidelity Investments. If Google succeeds, other outfits will be more likely to consider the little-used auction technique.

WIDE-OPEN RANGE. Not that pricing an IPO like Google's is an easy task. Estimates from different pros -- even those using the same analytical tools -- vary widely. Following the discounted cash-flow school, Standard & Poor's analyst Scott Kessler puts Google's value at $161 a share, or a nearly $44 billion market capitalization. Using the same general approach, Janco Partners' Martin Pyykkonen comes up with $76 a share, or $21 billion. Kessler also says when he used other valuation techniques, he came up with values as low as $95.50 per share. So he recommends bidding $110.

It would be overstating things to say all this is making my head spin. What I think of Google is actually quite clear:

I love its technology. An entire industry has been trying to catch up to Google technologically since 1999 -- and hasn't. So, when I see money managers quoted in the media blithely predicting that Microsoft will simply show up in the search market and knock Google's head off, it makes me laugh. Like Gates & Co. did to America Online (TWX), you mean? Like they did to Intuit (INTU)? To Yahoo! (YHOO)?

Neither do I worry much about the endless predictions that some startup will do to Google what Google did to one-time search leader Inktomi (INKT). Why? Among other reasons, venture capital is still notably hard to get. And any upstart would have to deal with a raft of now-established leaders.

Says Steve Sordello, chief financial officer of search rival (and Google partner) Ask Jeeves: "This business has been darn competitive for years. And no one has seen any revolutionary technology for a while. If someone came along with one, it would get snapped up rather than remain independent."

I like the search market very much. Growth estimates for search advertising say the market could hit $5 billion by 2008, up from $2.6 billion this year, according to market researcher Jupiter Research. With only about 3% of U.S. ads online, it's logical that the market should grow very sharply as people spend more time online and less watching TV, reading newspapers, and even, sniff, reading magazines.

I don't love Google's management. I met these execs only one time, when they visited BusinessWeek several years ago. CEO Eric Schmidt hadn't been hired yet, but we hosted Page and Brin in our 50th-floor dining room in Manhattan, one of those swanky settings that make you pleased as punch to be part of the much-despised East Coast media elite.

My takeaway, other than that I loved the technology, was that the founders may not have the maturity to run a major technology company. Brin's arrogance, in particular, was enough for me to wonder if it would create trouble for Google. He interrupted Page constantly. I've told people for years that I left that lunch thinking the two of them would kill each other. So much for that prediction.

Brin doesn't seem to have learned much humility since. Here's the quote one money manager says Brin gave at a meeting with institutional investors a few weeks back. Asked about Google's strategy for growth, he said, "If I tell you, you'll just ask again."

LOW-BALL STRATEGY. Stories like that feed Wall Street's darkest, if most inchoate, question about Google: Will it be nimble enough to react to changing markets, or will top execs be blinded by the sort of success that would go to anyone's head? That uncertainty also is fed by Google's unusual decision to not give earnings guidance and even by Google's "Don't Be Evil" motto. Especially since Schmidt was quoted in Playboy as saying, "Evil is whatever Sergey says it is."

Says a different money manager with a billion-dollar Internet fund: "They seem to think you should feel privileged [to buy Google stock]. That's the attitude -- and it's a bizarre one."

Over the next few days, I'll be weighing some different analyses, bidding strategies, and predictions as I decide how much of BusinessWeek Online's money to spend on my Google shares. Based on advice from several top money managers, I'll probably bid several times, with most offers being below Google's projected range, possibly by a good amount. I'll keep you posted.

In the meantime, don't believe the skeptical comments saying this deal will fall apart. People want to buy stock in Google, just at different prices. As S&P's Kessler says, it's going to be bigger than all but two or three Internet companies. And when you see big, successful funds like Legg Mason Value Trust saying it plans to place at least some bids within Google's price range, it's a sign that maybe things aren't quite as crazy as the fear, uncertainty, and doubt suggest. Mullaney is E-Business editor for BusinessWeek in New York

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