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Small investors scared off by exercise in stock democracy

Email|Print|Single Page| Text size + By Robert Weisman
Globe Staff / August 19, 2004

This was supposed to be the people's IPO, an exercise in shareholder democracy that would serve as a model for other companies seeking to go public without the suffocating embrace of Wall Street.

Instead, the snake-bitten stock sale of Google Inc. may be remembered as a botched exercise that scared off small investors and elicited barely concealed snickers from financial professionals.

''Google is damaged goods," said David M. Garrity, technology analyst with Caris & Co. in New York. ''For all intents and purposes, this is a failed IPO. In the process of mismanaging the IPO, the company will raise less money than it would have otherwise."

But by slashing the size and the price of its closely watched initial public offering yesterday, the Web search company may have finally dropped its shares into the range where money managers and institutional investors might be interested in buying them.

James T. Swanson, chief investment strategist for MFS Investment Management in Boston, said Google's repricing put its market value at a discount to Yahoo Inc., its more diversified competitor. And that may be a more reasonable valuation, he said.

''I think they bungled it," Swanson said. ''But it was also poor timing, because tech is in a mini-bear market now. Now it's come down to the point where we might take a look at it based on the fundamentals."

Google's so-called Dutch auction of its shares initially was hailed as a more transparent way of arriving at a fair offering price and opening the process to ordinary investors, while limiting underwriter fees and raising the maximum amount of capital for the company's business.

Most individual investors have been shut out of traditional IPOs, managed by investment bankers who collect generous fees from companies and distribute shares to favored clients. Many high-tech IPOs in the 1990s were priced at levels that guaranteed a first-day ''pop" for original investors -- at the expense of the company -- when the shares began trading in the aftermarket. Google's auction had also sought to reduce the opening-day bounce and temper speculation in its shares.

But a stream of bad publicity appeared to have dampened the enthusiasm of retail investors. In the months after it filed for its IPO in April, the company made several damaging disclosures. Perhaps the most serious was Google's admission that it may have given unregistered shares to employees and consultants, and its offer to repurchase them at a discount.

That disclosure prompted the Securities and Exchange Commission and the states of California and Connecticut to open investigations into whether Google violated securities laws. Other technical and procedural glitches delayed the start of the auction, pushing it into mid-August when many people were vacationing.

''Google's original price range had individual investors in mind," said David McAdams, associate professor of applied economics at MIT's Sloan School of Management. ''An extra few billion from Mom and Pop would change the price of the offering. But it seems that they didn't get as many individual investors as they expected."

Among the reasons, in addition to the lofty target price, may have been the high minimum account requirements at many brokerage firms participating in the auction. Google executives also were criticized for providing relatively little financial information to would-be investors.

''They were too smart by half," Garrity said. ''They wanted to manage it themselves, but their process was so cumbersome that they ended up alienating the very investors they were trying to attract. I don't think you'll see anyone try this experiment again until the next century."

McAdams, however, said the problem may have been less in the auction method than in its execution. He noted that auctions have been successful in other financial venues, from Treasury bond issues to electricity procurement, and said they may yet catch on among companies going public, the Google experience notwithstanding.

Garrity said traditional underwriters, who put their own capital at risk, have proved better at valuing companies than founders.

''Google would have been better off taking a traditional route," he said. ''In the end, an IPO is not a democratic process."

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

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