Google IPO fails to find results it sought

A humbled Google Inc. makes its market debut on the Nasdaq exchange this morning after raising $1.67 billion in an initial public offering that fetched about half of what the Web search company had previously estimated.

The company's shares, once touted as a miracle cure for the ailments of the technology sector, are opening -- at $85 -- 30 percent lower than the mid-range price Google had projected less than a month ago.

In a stunning retreat yesterday, Google slashed the number of shares it would sell through public auction to 19.6 million from 25.7 million, and dropped its target price range to between $85 and $95 a share from the $108 to $135 range it had projected on July 26. The move, coming in a filing with the Securities and Exchange Commission yesterday morning, was a tacit acknowledgement that the heavy demand once expected for the company's shares had failed to materialize.

Then, after winning SEC approval to close its auction yesterday afternoon, Google priced its IPO at $85 a share, the low end of its target range. The stock sale, still the largest ever for an Internet company, left Google with a market value of $23.05 billion. The shares will trade today under the symbol ''GOOG."

''They tested the market, and they found the expectations were too high," said Samuel L. Hayes III, investment banking professor at Harvard Business School. ''So they had to make adjustments."

The company, based in Mountain View, Calif., had hoped to be an innovator in IPOs, just as it was in search engine technology. But it was tripped up by bad timing as well as missteps by its founders and executives in managing a so-called Dutch auction of shares.

''I think they're having a surreptitious chuckle on Wall Street," where investment bankers had bristled at Google's auction-style approach, Hayes said.

While investors once had hoped Google's stock sale would breathe new life into the stock market, the IPO instead proved to be a casualty of the dismal market performance of recent months.

''A lot has happened since the company filed for its IPO in April," said Mark Mahaney, senior analyst with American Technology Research in San Francisco. ''The overall market valuations have turned south. The IPO market has shut down. And the Google team didn't impress people that they were worth $108 to $130 a share."

Still, the dramatic repricing of Google's shares didn't drag down other stocks, as many had feared. After initially dipping when Google disclosed its lower price range, the markets seemed to shrug off the news. The Dow Jones industrial average climbed 1.11 percent and the Nasdaq Composite index 2.01 percent yesterday, in one of their strongest showings in weeks. Shares of Google competitors Yahoo Inc. and Microsoft Corp. also rose, with Yahoo closing up 0.49 percent at $28.48 a share and Microsoft up 1.52 percent at $27.46 a share.

''The clear message from today's market activity is that Google had been overpriced," Mahaney said. ''This says very little about the financial fundamentals of Google as a company. It says a lot about how the market and retail investors value those fundamentals."

Google earns most of its money through advertisements related to its search results and by providing such contextual ads for other websites. The company posted net income of $79.1 million on revenue of $700.2 million for the second quarter, up from income of $64 million on revenue of $651.6 million in the previous quarter. Its operating income was $171 million for the second quarter.

In the end, market watchers said the lower valuation on Google's shares will leave the company with a more rational share price as it begins trading.

''Now they're in the range where they could be positioned for a modest gain," said Richard de Silva, senior associate at Highland Capital Partners, a Waltham venture capital firm. ''It would have been a bad thing for the market if the stock had gone down 25 percent on the first day. This is a great company with a strong brand."

The company's auction, intended to draw a class of retail investors left out of traditional Wall Street-run IPOs, wound up turning off many would-be shareholders because of the high target price, the paucity of financial information provided by Google's management, and the high minimum account balances required by many participating brokerage firms for individual investors seeking to place bids.

''The 'Dutch auction' was an unnecessarily complex process," de Silva said. ''And the complexity was one of the reasons Google had problems with the IPO, rather than the fundamentals of the company."

Aside from the timing and their management of the auction, Google founders Sergey Brin and Larry Page stumbled in granting unregulated stock options to employees and consultants in the years before the IPO -- a disclosure that has prompted inquiries by the SEC and California and Connecticut regulators -- and by granting an interview to Playboy magazine that may have violated SEC rules imposing a ''quiet period" on executives between the time they file for their IPO and the time shares begin trading. To placate SEC staffers, Google submitted the Playboy interview as an appendix to its prospectus.

More than anything, the disappointing valuation for Google was a matter of missing expectations.

''Across the board, everyone was just a little too excited," said Michael A. Goldstein, finance professor at Babson College in Wellesley and a member of Nasdaq's economic advisory board. ''Given that a tech boom didn't materialize this summer, it's probably good for the market to have a more realistic price."

And the Google offering price, even after it was scaled down yesterday, remains substantial, Goldstein added.

''This is still a great price," he said. ''But it's like getting the silver medal in the Olympics when you were expecting to get the gold."

Robert Weisman can be reached at weisman@globe.com.