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Get Four
|  | AUGUST 10, 2004
 SPECIAL REPORT By Scott Kessler The A-B-Cs of Google's Auction [Page 2 of 2] AUCTION BACKLASH? If the IPO price is between $108 and $162, the underwriters can accept all bids by sending electronic notices. If the price falls outside this range, notice will be provided of the final offering price and bids could be accepted within one hour thereafter. All investors submitting successful bids will receive an allocation of shares sold at the IPO price. If the price equals the auction-clearing price, successful bidders will be offered shares comparable to their bid amounts. If the number of shares represented by successful bids exceeds the number of shares offered, Google intends to allocate at least 80% of the stock contemplated. We believe there are several risks to the Dutch auction being employed by Google. Primary among them, in our opinion, is a potential lack of demand for the shares. We believe many institutional investors will opt not to participate in the IPO, reflecting uncertainty as well as perhaps to rebuke the Dutch-auction process the company is employing. We also think individual investors could be put off by the high anticipated IPO price and the requirement to buy a minimum of five shares. Moreover, we consider the auction process somewhat complicated and time-consuming, perhaps dissuading would-be investors. MORE QUESTIONS. Seasonality, potential significant major news events (that could serve as distractions), and the recent unfavorable climate for technology and Internet stocks could also negatively impact the Google IPO's prospects, in our view. We expect much of the investment community will not participate in the IPO process, owing to these risks. Moreover, with the most aggressive auction bidders more than likely receiving full-share allocations, early after-market demand could be lacking, in our view. Thus, notwithstanding our assessment of Google's potential per-share valuation, we believe the Dutch-auction process could have a substantial negative impact on the stock, and recommend would-be investors be particularly prudent. We believe that even though the IPO price range of $108 to $135 per share indicated by Google is reasonable based on a variety of valuation methodologies, risks related to the Dutch-auction process and other factors are material. Google could possibly be priced and trade below the company's indicated range and our assessment of its possible valuation of $121 to $127. What, then, should would-be investors in Google's IPO do? We advise them to bid $110 for each desired share. This would imply 10% upside to the low end of our estimated fair market value range ($121). (See BW Online, 8/10/04, "Putting a Value on Google, Part 2".) We also suggest bidders not commit to full positions in the Dutch-auction process, allowing for opportunistic dollar-cost averaging if the stock falls in the first hours, days, or weeks of trading. We expect these chances to present themselves, particularly due to what we anticipate will be substantial share-price volatility. Required Disclosures As of June 30, 2004, SPIAS/SPSI and their U.S. research analysts have recommended 35.9% of issuers with buy ratings, 52.7% with hold ratings and 11.4% with sell ratings. 5-STARS (Buy): Total return is expected to outperform the total return of the S&P 500 Index by a wide margin, with shares rising in price on an absolute basis. 4-STARS (Accumulate): Total return is expected to outperform the total return of the S&P 500 Index, with shares rising in price on an absolute basis. 3-STARS (Hold): Total return is expected to closely approximate the total return of the S&P 500 Index, with shares generally rising in price on an absolute basis. 2-STARS (Avoid): Total return is expected to underperform the total return of the S&P 500 Index and share price is not anticipated to show a gain. 1-STARS (Sell): Total return is expected to underperform the total return of the S&P 500 Index by a wide margin, with shares falling in price on an absolute basis. All of the views expressed in this research report accurately reflect the research analyst's personal views regarding any and all of the subject securities or issuers. No part of analyst compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. Note: Scott Kessler has not participated in, and will not participate in, the Google IPO process. Price charts and required disclosures for all STARS-ranked companies can be found at www.spsecurities.com. Other Disclosures The research report from which this article was excerpted was prepared by Standard & Poor's Investment Advisory Services LLC ("SPIAS") and distributed in the U.S. by Standard & Poor's Securities, Inc. ("SPSI"), a registered broker-dealer, and a member of the New York Stock Exchange, Inc. and National Association of Securities Dealers, Inc. The research and analytical services performed by SPIAS are conducted separately from any other analytical activity of Standard & Poor's. No research analyst that prepares a research report on a subject company has a financial interest in or is associated with that subject company. Disclaimers This material is based upon information that we consider to be reliable, but neither SPIAS nor its affiliates warrant its completeness or accuracy, and it should not be relied upon as such. Assumptions, opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale so any security or other financial instrument. Securities, financial instruments or strategies mentioned herein may not be suitable for all investors. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation of particular securities, financial instruments or strategies to you. Before acting on any recommendation in this material, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice.
 Analyst Kessler follows Internet software and services stocks for Standard & Poor's Equity Research Services All of the views expressed in this research report accurately reflect the research analyst's personal views regarding any and all of the subject securities or issuers. No part of analyst compensation was, is or will be, directly or indirectly related to the specific recommendations or views expressed in this research report. Standard & Poor's Regulatory Disclosure Any advice, analysis, or recommendations contained in articles labeled "Insight from Standard & Poor's" reflect the views of Standard & Poor's, which operates separately from and independently of BusinessWeek Online. It is possible that BWOL may from time to time publish information that is not consistent with advice, analysis, or recommendations that are published by Standard & Poor's. Standard & Poor's and BusinessWeek Online are each units of The McGraw-Hill Companies, Inc. Get BusinessWeek directly on your desktop with our RSS feeds.  Add BusinessWeek news to your Web site with our headline feed. Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video. To subscribe online to BusinessWeek magazine, please click here. Learn more, go to the BusinessWeekOnline home page  | | |
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