Editor’s note: Linda Markus Daniels is a founder of and principal in the Research Triangle Park law firm of Daniels Daniels & Verdonik, P.A.It has become common vernacular: “Did you google it?” The next unabridged dictionary may define the term as a verb meaning to put a name or subject into a search engine to see what information is readily available about it.

In recent days however, “google” appears to have taken on a new meaning. That same next edition of the dictionary may also include “google” as a noun, such as in “it was a real google,” meaning alternatively ill-planned or a disaster. Will it also become an adjective, such as in “it was a googled event?”

One commentator has even suggested it may take on new derivatives such as “GOOG-plosion.” Clearly the Google IPO, which priced at about 9 PM Wednesday at $85 per share after having slashed the number of shares offered to prop up the price, was not an unmitigated disaster (after all it did raise $1.67 billion), but it clearly was not the success anticipated by Google’s executives and venture capital backers.

The Good

The results of the Google IPO, which will allow trading to begin when the market opens this morning, were not all bad. The auction process did allow more of the IPO proceeds to go into the coffers of the Google ($1.2 billion) or the pockets of its executives and investors ($473 million) than would have happened under a traditional underwritten offering, where far more of the proceeds would be captured by the underwriters and their best customers.

The last second removal from the offering of shares originally planned to be sold by Sequoia and Kleiner, a change necessitated to prevent the price from plummeting further, also had its benefits. These giant venture capital firms will not be allowed to benefit from the auction, but rather will have to wait for the market to stabilize before seeking profits. The minimum 180-day lock up is seen by many as being a much fairer result, even if unintended, than the planned exit by these venture firms at what many see as being at an inflated sale price.

Perhaps the results also show that the investing public is not a gullible as Google perceived. Despite the hype, the Class A shares offered in the IPO have only 1/10th the voting rights as shares owned by Google management. This and other factors led investors to tell Google the price was too high, resulting in a drop $50 per share in the original pricing.

The Bad

So what went wrong in the best laid plans of Google and its gurus? This is a topic on which much will be written in the day, months and even years to come. There are many factors that contributed to the results, including:

  • The IPO tried to tackle too many different issues simultaneously. The dutch auction process alone was enough of a market anomaly without adding to it the different rights of different shareholders, the attempted sell off of a large number of shares by executives and early investors, and other unusual aspects of the offering.

  • Google’s suggested bid range was at the high end of what it thought it could get and much interest had been lost by the time the prices were finally slashed. Institutional investors were also price-skittish with the venture investors trying to head out the door at the unusually early stage. Further, nothing seemed to impact the price in any way, including the settlement with Yahoo for over $300 million just days before the auction commenced.

  • The per share price, regardless of the Company’s value, was just too high. IPO investors are used to seeing a $15-25 range. A stock split prior to the offering may have increased the comfort level of those investing.

  • Too many shares were put onto the market originally (and perhaps ultimately). Skilled underwriters may have been able to better gauge the market…and again the damage had already been done by the time 6 million shares were withdrawn.

  • Another 4.6 million shares can hit the market 15 days after the IPO, and then 24.9 million more may be unlocked and put onto the market in 30 days. Given the final offering was for 19.6 million shares, these additional shares will increase by 150% the number of shares begin traded and it seems impossible that this massive number will not drive the price down significantly.

  • August is a terrible month for an offering, let alone a mega-offering. Many of the major investors are on vacation…and for that matter so are the grandmas Google was hoping to attract through it “egalitarian” efforts.

  • While all IPOs uncover dirty laundry and while some may say Google’s high profile resulted in more publicity about its flaws, the issuance of 28 million shares to insiders without proper registration under the securities laws not only concerned investors, but so did the announced SEC investigation and fines. This coupled with the Playboy interview left investors wondering how much more dirt would be uncovered. Further, the fact that Google’s management was reputed to be less than forthcoming with information during the road show apparently left major investors concerned about the Company’s true internal situation.

  • There is great skepticism as to the after-market value of the shares. It was, of course, explained in the prospectus that the goal was to price at fair value so the traditional price run in the first few days would not occur…but most IPO investors are not in the buy and hold mold.

    • Google will, of course, say that all of NASDAQ for tech stocks is down and that there was a market correction during the road show. And let us not forget the conspiracy theory that all the investment bankers are secretly trying to tank the auction because it threatens the IPO money machine.

    And the Ugly…Really Ugly

    The ugly part of this IPO process is yet to come. There seems little question that what has occurred over the last several days with the auction process will result in numerous lawsuits against the Company. There are many folks that think that “Don’t be Evil” mantra on page 32 of the prospectus has been violated time and time again. We don’t know how many lawsuits will pop up for failure to disclose dirty laundry (like a potential lawsuit for the auction process itself infringing on patent rights of a small company), or from those who think they were misled by the process.

    Of particular note is prospectus text which reads: “During the bidding process, we and our underwriters will monitor the master order book to evaluate the demand that exists for our initial public offering. Based on this information and other factors, we and our underwriters may revise the public offering price range for our initial public offering as described on the cover of this prospectus. In addition, we and the selling stockholders may decide to change the number of shares of Class A common stock offered through this prospectus. It is very likely that the number of shares offered by the selling stockholders will increase if the price range increases. In an auction process, this could result in downward pressure on the price.”

    Absolutely no mention was made of the possibility of what occurred yesterday: a reduction of shares with upward pressure on the price. While those who put in a bid at a high price with the expectation that the number of shares available would drive down the price (with all buyers in a dutch auction paying the lowest price regardless of the price bid), did have a few hours to withdraw their bids, the rush at the end to close before many could react will clearly be fodder for claims.

    Google might as well plan to spend a large portion of what was raised in defending and paying damages in these upcoming lawsuits. The big remaining questions are

    Could many of these lawsuits have been avoided under a more traditional process

    Will Google actually come out ahead or behind?

    Daniels Daniels & Verdonik, P.A. has been serving the legal needs of entrepreneurial and high technology clients for more than 20 years. Linda Markus Daniels concentrates her practice in the representation of entrepreneurial and technology-based businesses, focusing on corporate, technology, securities and international matters. Comments or questions can be sent to ldaniels@d2vlaw.com