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 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.
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:
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 email@example.com