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AUGUST 16, 2004
By Timothy J. Mullaney My Google Grubstake Not mine exactly -- BusinessWeek Online's, which I'm using to buy into the IPO auction. Here's my thinking going in 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:
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