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Google IPO RevisitedPosted by Retirement on: 2005-09-16 19:18:08 in category:
401(k) [ Print | Permalink / 0 Comment(s) ] Google IPO Revisited: Insiders Got Choice Other Sellers Didn't When Offering Price Was Cut, Some Sold Fewer Shares; Others Had to Sell More Filling Out the 'Green Shoe' By KEVIN J. DELANEY Staff Reporter of THE WALL STREET JOURNAL September 16, 2005; Page A1 When Google Inc. announced plans to go public last year, its founders stressed that this was no conventional company. Its official philosophy was "Don't be evil." It aspired to "make the world a better place." And Google would use an unusual auction process that it said should result in more-equal treatment of small investors. But some investors selling shares in the offering were more equal than others. Shortly before the August 2004 initial public offering, when demand proved less than anticipated, Google slashed the expected offering price range. Some insiders who had large stakes in the business and seats on its board decided to cut the number of shares they planned to sell -- in some cases not to sell any at all. Now, with Google stock up 256% since the offering, the value of the shares they held onto is up about $1.7 billion. Some early Google investors didn't get this same opportunity to reduce their share sales. Indeed, several were told they had to make an even bigger share sale than Google had scheduled them for, at the diminished price, according to people familiar with the matter. Two investors in that group, Stanford University and the venture-capital firm Angel Investors LP, protested, and Google backed off. Google allowed Stanford to drop out of the IPO altogether. And Google hastily struck a deal with Angel, compensating its funds for some of the gains they had foregone by selling so many shares at the reduced IPO price, according to people familiar with the matter. An individual investor wasn't so lucky. A Stanford professor, David Cheriton, tried to pare back his share sales after Google set the lower price, but a Google lawyer held firm. Another investor is unhappy about it but didn't lodge a complaint, unaware that others had been allowed to hold back shares. That investor's view today is that "only the suckers" sold all the shares they were slated to at the sharply reduced IPO price. Google, which did a follow-on offering of 14.2 million shares this week, declined to make any executive available to discuss the IPO. A spokesman for the Web search and advertising colossus wouldn't comment except to say: "We're pleased overall with the results of the IPO and we have many happy shareholders. We're especially proud of the auction we conducted because it allowed anyone, and not just a select few, to participate in it." Securities lawyers say it doesn't appear that Google's behavior in the hectic days around its IPO violated any regulations. But taken together, the events suggest that when trouble stirred, some top executives and directors acted in ways that benefited them while leaving out investors who weren't as well-positioned. The new information offers an unusual glimpse into the management style at Google and the behind-the-scenes drama of a historic stock-market episode. To be sure, the insiders' decision to hold back shares at the last minute helped the IPO to get off the ground by reducing the number of shares for which underwriters had to find buyers. Moreover, these insiders couldn't have known they would profit richly by hanging onto the shares. The price could have fallen instead of surging. They would have had to sit and watch it fall because of "lockup" provisions that would bar further sales for a period of months. Still, these insiders were in a privileged position to guess the stock's future trajectory. Google announced in its IPO prospectus that it wouldn't provide traditional earnings guidance. While it took this stance to avoid short-term thinking, the move also likely left Google's directors knowing more about company prospects than other investors. The third quarter, which Google was in at the time, proved to be one of spectacular growth. When Google filed in April 2004 to go public, it outlined an unusual IPO method that was widely seen as an assault on Wall Street practices. In place of the standard system -- in which underwriters sometimes had let favored investors buy shares and priced the offerings low so those investors made quick gains -- Google would use a "Dutch auction." People who sought to invest would submit bids, saying how many shares they'd like and what they'd be willing to pay. Next, Google and the underwriters would use these bids to calculate a price -- one just low enough to get all the shares sold. Then, everybody who bid at least that much per share got to buy, all at that same price. Google said it chose the method in part to "be inclusive of both small and large investors." (In this week's follow-on offering, Google sold shares the conventional way.) Hot as Google was as its IPO approached, a string of events in the spring and summer of 2004, including Google missteps, cooled some investors' thirst for its shares. For one, Playboy published an interview with founders Sergey Brin and Larry Page during a pre-IPO period when there are restrictions on what insiders can say to the press. Also, Google had to acknowledge that it hadn't properly registered some options granted to employees and others. At various points, three intended underwriters, including Merrill Lynch & Co., bowed out. Google officers' refusal to discuss forecasts and other aspects of the business with investment institutions also put off some investors. So did the unfamiliar auction process and, in particular, the seemingly lofty price Google said it expected to get -- $108 to $135 per share. By the week of the IPO in mid-August 2004, Google executives saw that investors had put in fewer bids than expected and at lower prices. The drama heightened on Monday, Aug. 16, as Google approached its planned deadline to close the bidding. Investors hadn't submitted bids sufficient to buy the planned 25.7 million-share offering at the projected price range. In a conference call, according to someone familiar with it, Google Chief Executive Eric Schmidt told executives and advisers that the auction had failed. When the call ended, participants set about trying to salvage the IPO in discussions that lasted into the night, people familiar with the matter say. They describe how some executives and advisers holed up in a conference room, with the blinds drawn, in the Palo Alto offices of printer R.R. Donnelley & Sons Co., preparing to change the prospectus. Google worked through a revised plan that slashed the expected offering price to $85 to $95 a share. It also made a 24% cut in the number of shares to be sold -- to 19.6 million -- as a few insiders pulled back shares they had planned to sell. Messrs. Brin and Page reduced their planned sales by half, or by about 481,000 shares each. Mr. Schmidt, the CEO, and K. Ram Shriram, a director and early investor, also cut their planned share sales by half. Google's two main venture-capital backers, Kleiner Perkins Caufield & Byers and Sequoia Capital, dropped out of the offering entirely, hanging on to all of their shares. With those changes, six of the nine Google directors reduced the number of shares they or institutions they represented planned to sell, and a seventh did so shortly. The other two directors never planned any sales. The cuts made it easier to complete the offering. But they played havoc with a section of the IPO known as the overallotment, or "green shoe," option. Overallotments, a common feature of IPOs, let underwriters sell additional shares at the IPO price if the demand is there. The extra shares come either from the company itself or from early, pre-IPO investors. Before an initial offering takes place, selling investors commonly sign contracts in which they agree to sell up to a certain number of their shares, including, potentially, some extra ones in the green shoe. Sequoia Capital's decision to withdraw from the IPO meant it also wouldn't be selling any shares in the green shoe. And Mr. Shriram halved the number he would offer in the green shoe. Bottom line: Google had to find other shareholders who would agree to sell more than 400,000 additional shares in the green shoe at the lowered IPO price, or risk additional delays. Google could have put up the shares itself. But then it would have had to make additional changes in its Securities and Exchange Commission filings, likely further delaying the offering. A new offering plan Google filed on Wednesday, Aug. 18, showed that seven pre-IPO investors would sell more green-shoe shares than previously planned. The seven included Time Warner Inc.'s America Online unit, which owned Google shares as a result of an earlier pact between the companies; Stanford University, which had licensed to Google a patent developed by Messrs. Page and Brin when they were graduate students; and Angel Investors, whose investors included Microsoft Corp., Tiger Woods, Arnold Schwarzenegger and Henry Kissinger. The new offering plan -- available that Wednesday through Google and SEC Web sites -- also for the first time gave the new, lower price range. Pages 102 to 104 showed the reduced sales by some insiders and the increased green-shoe sales by the seven other investors. Google didn't otherwise notify some of the seven, before the stock started trading, that it now expected them to sell more shares, say people familiar with the matter. Stanford, whose president, John Hennessy, is on Google's board, changed its mind about selling. It had been slated to sell 467,600 of its Google shares through the IPO and green-shoe option. But after Google said the shares would go for only $85 to $95, "Stanford decided on price to withdraw from the offering and proactively communicated that to Google, which honored our request," says Michael McCaffery, CEO of Stanford Management Co., overseer of the university's portfolio. Kleiner Perkins and Mr. Shriram declined to comment, while Sequoia Capital didn't return calls. Pushing ahead, Google closed the auction that Wednesday and priced its shares at $85. They would start trading on Nasdaq the next day. Google filed a new IPO plan, in which Stanford no longer appeared as a seller. Stanford had been expected to sell 283,393 shares in the green shoe. The new plan said an equal number would come from AOL instead. AOL says Google contacted it before the start of trading and AOL agreed to sell the additional shares. Google and its underwriters now would have three more business days -- until the following Tuesday -- to actually deliver these shares to the buyers. In the meantime, sellers could see what was happening to the stock they had agreed to sell for $85: It was surging. Shares rose more than $15 on the first day. Just after 3 o'clock the next morning, a Friday, a lawyer at Google's outside law firm, Wilson Sonsini Goodrich & Rosati, emailed investors who had agreed to sell shares in the green shoe. There were 10 who were expected to sell about three million shares this way. "We need you to confirm your intent to sell shares allocated to you in the overallotment," said the email, according to Stanford's Mr. Cheriton. He said it was signed by Wilson Sonsini lawyer Jennifer Kercher. She declined to comment. Mr. Cheriton, a computer-science professor and one of the search engine's first investors, had agreed to sell some of his shares in the green shoe. Disappointed they would go for only $85 each, he welcomed this apparent opening to withdraw from the overallotment. Mr. Cheriton says he replied by email at 11 a.m. Friday saying, "I hereby withdraw my intent to sell shares in the overallotment." Mr. Cheriton says he expected Google to give all the pre-IPO investors a chance to revise their selling plans if the offering price changed significantly. He acknowledges, however, that any contracts he signed with Google and its underwriters may not have provided for a change of heart. He declined to provide contract details, nor would Google and the lead underwriters. Specifics of such agreements would be critical in determining whether Google's actions raised any regulatory issues. It also is possible that Google directors and the institutions they represented had negotiated terms that allowed them to more easily withdraw from the offering than other investors could. "I don't think there were necessarily any legal violations," says David Martin, a former head of the SEC's corporation-finance division, now with the law firm Covington & Burling in Washington. Mr. Martin, who wasn't involved in the Google sale, adds, "When you see all of these last-minute, sticky offering dramas play out, you see what people need to do to save" initial stock offerings. Friday evening, a Google lawyer, Jeffrey Donovan, told Mr. Cheriton by phone he couldn't back out of the overallotment, Mr. Cheriton says. Mr. Cheriton says he replied that he would talk to his lawyer, but then never pursued the issue, partly because he was already locked in a legal contest with his ex-wife. Google wouldn't make Mr. Donovan available for an interview. Mr. Cheriton says the episode belied Google's high-minded rhetoric. "The well-connected pulled out. The less-well-connected were green-shoed." Still, his share sales brought him nearly $58 million, and he says he doesn't think about it anymore. Angel Investors proved a tougher sell. The firm with the celebrity investors would have had to sell about 31,000 more green-shoe shares than planned under Google's last-minute changes. The first-day rise in Google shares meant Angel's funds had already missed out on more than $474,000 in appreciation just on these 31,000 or so shares, to say nothing of the gains on all the other shares Angel sold in the IPO and overallotment. In increasingly testy phone calls with Google executives on the first trading day, the general partner of Angel Investors, Ron Conway, threatened to withhold consent for selling any of Angel's shares in the offering, according to people familiar with the matter. That could have forced Google to rejigger it yet again -- and make public a dispute between Google and a major investor. Negotiations continued through the weekend, as underwriters neared the Tuesday deadline for delivering shares to purchasers. Google's changes effectively had Angel selling more shares at a lower price than it had earlier agreed to, says someone familiar with the matter. On Monday, Aug. 23, Google shares rose again, to $109.48 as of 4 p.m. That evening, Google agreed to make a cash payment to Angel Investors, according to the people familiar with the matter. The exact sum isn't known, but two people familiar with the matter say it was hundreds of thousands of dollars. Angel Investors has since all but disbanded after selling its portfolio earlier this year. Shannon Rose, who was its controller, said Angel had no comment. People familiar with the matter say Google didn't offer similar payments to several other investors who were asked to make larger share sales in the overallotment after Sequoia pulled out and Mr. Shriram cut his green-shoe sales. Not all investors who had to sell more shares than expected at $85 are upset by the episode. A trust in the name of Michael Homer sold 3,761 more shares in the overallotment than Google had initially planned, judging by the sales Google disclosed in its filings. Mr. Homer, a former executive at Netscape Communications Inc. and Apple Computer Inc., says he can't recall whether Google told him about the change. He says he remains a big fan of Google and isn't going to quibble over any missed gains. Homepage Please support are sponsors. 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