Taking A Gander At Google

As the IPO approaches, its allure is wavering. How do things stand?

Back in 2002, tech insiders cast a hopeful eye toward Mountain View, Calif. There, amid an industry mired in deep doldrums, a group of 500 headstrong engineers were building an increasingly popular search engine and, surprisingly, making money hand over fist. Many felt Google Inc. could be a beacon for the struggling tech sector, its success helping to open the market for entrepreneurs and capital investment. Today, Google is on the verge of its long-awaited initial public offering, but all of a sudden the event no longer seems like the debut of a child prodigy. Google's IPO is surrounded by as much confusion as anticipation. Here's a look at the key issues facing the company:

What's behind Google's diminishing allure?

Sure, some of the dark clouds over Google could be the result of potential investors talking down the company's prospects in hopes of snatching up shares during Google's IPO auction. But the company itself is responsible for much of the recent bad press. Probably most disconcerting to investors and pundits alike is Google's revelation in its IPO paperwork that it may have violated securities laws by allocating millions of unregistered shares to employees and consultants. To rectify the problem, Google has offered to buy back the 23 million-plus shares at a cost of $26 million. The move likely will mollify the Securities & Exchange Commission and state watchdogs, say securities attorneys. But it certainly raises serious questions for investors. If the company managed to flub such a mass distribution of shares, perhaps it is capable of even more costly mistakes.

That's not all. Google's squeaky-clean image also took a hit on July 20, when its top lawyer, David C. Drummond, was notified by the SEC that it is probing his role in possible accounting violations at his former employer, SmartForce, where Drummond served as CFO. At Google, he has helped orchestrate the company's unique IPO process; he also oversees its alliances and acquisitions. A company spokesperson says Google management has "the utmost confidence" in their general counsel.

Where does the IPO process stand?

Google's intricate listing process is finally starting to crank into motion. The first step, registering interested investors, is expected to close on Aug. 12. Those who haven't gone to ipo.google.com by then to sign up won't be able to participate in the public offering. Those who have signed up and selected a bank will be asked to submit their bids -- a number of shares and a price per share -- as soon as Aug. 13, though possibly several days later.

To prevent investor gamesmanship and ensure that bids reflect real-world demand, Google can close the bidding process at any time and won't announce how long it will last. One Wall Street analyst, however, speculates that it could take up to four days. At that point, Google and its bankers will aggregate the bids to determine the offering price. They will likely settle on a price slightly below where demand meets Google's supply, as indicated by the auction results, in an effort to generate at least a mild near-term gain for its IPO investors. At that point, shares will be allocated and the stock will begin to trade.

Have those who missed the registration window lost out altogether?

Not likely. People who invest after the offering may have just as good a shot at making money on Google as its IPO investors. That's the point of this whole exercise: to limit the huge first-day pop in IPO prices, which became the norm in the 1990s and benefited well-connected investors at the expense of the company. An auction is supposed to predict true investor demand more accurately. And by diminishing the first-day jump, the company pockets much of the cash that has long padded the wallets of Wall Street's favorite customers.

Because so much effort will be made to price shares close to actual demand, there's little disincentive to wait, see how the IPO goes, and buy some shares in the aftermarket. That's even more true since Google employees will be permitted to unload 4.6 million shares, or 2% of Google's equity, just 15 days after the offering. Says Kevin Landis, chief investment officer at institutional investor Firsthand Funds: "We probably won't bid. But later that same week, we could go right in and buy it."

Is Google's IPO as democratic as the company claims?

Google's anticipated price range of $108 to $135 per share is the steepest per-share offering in recent memory. Indeed, the high price translates into a lofty valuation. That's being increasingly questioned since Google's growth prospects are uncertain and because its multiple would be just a hair below that of Yahoo! Inc. (WHO ), a more diverse, seasoned Internet company. With most stocks on the New York Stock Exchange trading in the $40-to-$50 range, Google's asking price could have a chilling psychological effect on small investors, says Reena Aggarwal, professor of finance at McDonough School of Business at Georgetown University in Washington.

Still, the nosebleed price aside, Google's IPO could well be one of the most democratic offerings conducted in years. The allocation of shares has moved from the conference rooms of elite investment banks intent on rewarding their wealthiest clients to an auction process open to all. And while Google's required minimum investment of five shares could cost from $540 to $675 -- a lot of cash for a mom-and-pop investor -- it's a far lower barrier to entry than most offerings conducted in recent years. And retaining a small threshold offers at least some incentive for prospective investors to spend the hours leafing through Google's financials and gaining a more thorough understanding of the business. "I think $500 is actually quite low," says Tim Loughran, a finance professor at Mendoza College of Business at the University of Notre Dame in Indiana.

Will Google's experimental IPO be a roaring success? Maybe. But just getting to the offering has proven far more daunting than anybody had expected.

By Ben Elgin in San Mateo, Calif.

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