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Decisions Based on (More) Perfect Market Data

By - August 18, 2004

concernedtraderWhat’s interesting to me in decoding Google’s latest IPO twist is how the execs, VCs, and bankers made the decision to lower the price, and how they decided to cut the number of shares offered. Lowering the range happens all the time in iffy markets- often it’s a sign that the offering is in trouble. In the past few weeks we’ve seen it over and over, most recently with Lindows and PlanetOut. But in Google’s case, there was an additional actor: the nearly perfect window of market demand information. Armed with that information, Google’s managers could more accurately predict what will happen in the aftermarket once the offering goes live, thereby allowing them to lay out scenarios for several potential chess moves, and make the decision they think best.

Perhaps Google could have gone out within their original range, but it seems obvious that had they attempted to do so, the stock would have dropped significantly thereafter. And the only people who really made hay would have been insiders and the company itself – the investors would have initially felt soaked.

In the release cutting its range and size, Google announced that insiders have decided to hold back selling shares, presumably because market demand will only support so many shares at the new range. From the WSJ coverage:

The company also said Wednesday that the number of shares available to the public will be lowered by 6.1 million as existing holders will now only sell 5.5 million shares, down from about 11.6 million shares, “in view of this new price range,” the company said in its statement Wednesday. Company insiders, including co-founders Sergey Brin and Larry Page, are reducing the number of shares they will sell in the IPO. Venture-capital firms Sequoia Capital and Kleiner Perkins Caufield & Byers are now selling no shares at all in the actual IPO.

But this is worth thinking through a bit more. The release also noted that “In addition, the selling shareholders have granted the underwriters the right to purchase approximately 2.9 million additional shares of Class A common stock at the initial public offering price to cover over-allotments.”

I have no idea if this means the banks will in fact buy those shares for “over-allotment”, but it seems they are in the game in a much bigger way now. One could quite cynically claim that the price was lowered and the offering size cut so as to insure the “pop” so famously spurned by the auction process (if it were up to the banks alone, I’d call that a logical conclusion). But I can imagine that given lighter than expected demand, the banks, with their massive buying power (via institutional investors), might have gained the upper hand, and demanded that they get in on the action after being cut out of the deal for so long. Then again, I’m probably missing something insanely obvious here, so any of you investment banking types out there, please correct me if so.

I can also imagine all the parties involved wanted to make sure the stock would at least be stable in the aftermarket, and not drop precipitously. One can fairly assume that given the (more) perfect market data, the offering as it stands has a good chance of doing just that. Then again, going below 100 might just set off a speculative frenzy…running the stock up, providing the pop everyone was looking to avoid. Who knows?

That the VCs – John Doerr and Mike Moritz – are now selling no shares at all puts them back in a position of normalcy for most venture-backed IPOs. This is how it’s usually done – the VCs wait for the stock to rise in the aftermarket, then they sell.

Should be interesting to watch it open. When might that happen? Still unsure, though Google asked the SEC to make their statement effective today. If the SEC does (and it’s not clear they will, given they are still asking questions about the Playboy interview), the stock could trade on Thursday.

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  • pb

    I think it was just a matter of Google and/or bankers reaching on the original valuation. $29b-35b was a little ridiculous.