Google Edits Its Prospectus to Highlight Risk of Loss
June 22, 2004
By SAUL HANSELL and JOHN MARKOFF
Google revised the document it will give prospective investors yesterday, to state even more pointedly that the unusual auction process for its initial stock sale could cause its shares to fall after the offering.
"If your objective is to make a short-term profit by selling the shares you purchase in the offering shortly after trading begins, you should not submit a bid in the auction," the revised prospectus stated.
Google's revisions were probably made in response to comments from the staff of the Securities and Exchange Commission, which has to approve the prospectus before the stock sale. But any S.E.C. comments are confidential.
A spokeswoman for Google, which operates the Web's leading search engine, declined to comment on the filing. It is not clear whether there will be more amendments.
Some securities lawyers speculated that the commission would force Google to remove an unusual letter from its founders, Larry Page and Sergey Brin, which argues that the company is unique because of its long-term view of the business.
The revised prospectus still contains the letter, although it has moved to the middle of the document, after the enumeration of the potential risks of investing in the company.
A section of the letter in which the founders discussed their debate about going public was dropped. The founders also added a nod to the view that managing for the long term may not be the best course.
Investors, they noted, "may have trouble evaluating long-term value, thus potentially reducing the value of our company," they wrote. "Competitors may be rewarded for short-term tactics and grow stronger as a result."
The letter keeps its jab at Wall Street analysts, noting that companies that try to manage their earnings to be consistent with analysts' forecasts "often accept smaller, predictable earnings rather than larger and less predictable returns."
But the risks section of the prospectus now warns that analysts may still have the power to affect the stock's price. It notes that because of the auction process, the initial price "may have little or no relationship to the price determined using traditional valuation methods." So when analysts start to cover Google's stock, presumably using those traditional methods, they may publish target prices far below the offering price, possibly causing the price to decline.
One brokerage firm, Merrill Lynch, that had originally been listed as part of the 31-member underwriting group, was not listed in the revised prospectus. A Merrill spokeswoman declined to comment.
David Trone, an analyst with the Prudential Equities Group, wrote in a report to clients yesterday that it appears likely that Merrill Lynch dropped out because it concluded that it would not make money in the deal, which is being led by Morgan Stanley & Company and Credit Suisse First Boston.
In the amended filing, Google underscored the likelihood that its executives and employees would sell shares of the company's stock during the initial public offering. The company states in its prospectus that these sales will help stabilize the auction process and will lead to greater transparency in contrast to the traditional "lock-ups" which prohibit company insiders from selling shares when a firm goes public.
But Andrew Kessler, an independent Silicon Valley investment analyst, said he was concerned that such sales might provide Google executives with a way to manage the company's stock price.
"It's another thing that makes this completely different than any other I.P.O. that has been done in the past 50 years," Mr. Kessler said. "Google wants their cake and to be able to eat it, too."
The language in Google's prospectus is in sharp contrast to the restrictions on executives at Salesforce.com, a San Francisco software firm expected to go public this week.
The Salesforce offering states that the company's employees and shareholders have agreed with Morgan Stanley not to sell shares for 180 days, without written prior consent.
Separately, there was an indication yesterday that Google's vaunted corporate culture may be under stress as a result of competition and the stock offering. As of yesterday afternoon, typing the words "out of touch management" into Google caused the search engine to list as its first result a page describing the company's top management.
A person close to the company said that Google employees had engaged in the practice of "Google bombing." A Google bomb is an attempt by a group of people to cause a particular Web page to become the first result for a search phrase. The Google spokeswoman declined to comment.
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