More Investor Doubts Cloud Google IPO

Fri Aug 6, 2004
By Reed Stevenson

SEATTLE (Reuters) - Concern over Google Inc.'s growth prospects, pricey market value and a complex IPO process has intensified after the Web's most popular search engine delayed its widely anticipated stock auction, analysts and investors said on Friday.

Google and its underwriters, are trying make sure that fund managers will be able to register to buy shares, according to a source familiar with the auction.

Google has not publicly set a date for the initial public offering, but the source told Reuters on Thursday that it may be delayed by about a week. The IPO could happen after bidding next week.

On Wednesday, Google disclosed that it may have issued more than 23 million shares and 5.6 million stock options illegally, triggering an investigation by California regulators.

Google, headquartered in Silicon Valley's Mountain View, is planning to issue more than $3.3 billion in stock to the public, putting the company's value at more than $36 billion.

But investors have begun showing skepticism over the stock offering because Google won't be priced by its bankers, but rather by the market itself, adding yet another variable to the guessing game over Google's growth prospects and valuation.

After posting double-digit sales growth in every quarter since 2002, Google grew revenue by 7 percent in the quarter ended in June, a dip that made many analysts take notice.

Assuming that profit margins remain intact, slower growth could make it difficult for Google to sell its shares within its expected range of $108 to $135.

At the high end, Google would be valued at 188 times its earnings over the last four quarters, compared with a trailing ratio of just over 100 for close rival, Yahoo Inc. (YHOO.O: Quote, Profile, Research)

TOO HIGH A HIGH?

"The high end of their price range doesn't make sense as we look at it. We'll come in fairly lower than that," said Connor Browne, an associate portfolio manager at the Thornburg Core Growth Fund.

Some fund managers also said potential investors could be talking down the deal in the hope of driving down the price.
Google's proposed auction process on the Web has divided the investment community. Some say it puts more control over pricing into the hands of the everyday investor. Detractors say it may lead to the shares being vastly over- or under-valued.

Google is adopting a modified version of a "Dutch auction," where investors would submit bids that include the price they are willing to pay and a number of shares they want to buy.

From the bids, Google will find the highest price at which there is demand for all of the shares, called the clearing price. The offer price will be at or below the clearing price.

"I think it was wrong from the beginning," said Mark Mahaney, analyst at American Technology Research, of the auction process. "I will assume the worst."

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