Mendoza School of Business

Google investors wait the dropping of 39 million shoes

Published: November 15, 2004 / Author: GARY Times

Google Investors Await the Dropping of 39 Million Shoes

SAN FRANCISCO, Nov. 14 – Google investors may find out this week whether there really can be too much of a good thing.

To the surprise of some investors and industry analysts, Google’s stock price has more than doubled in the three months since its public offering, closing at $182 on Friday. One possible reason for the surge is that relatively few shares of Google have been available to trade.

Typically, a company sells 15 percent to 20 percent of its shares to the public in a new stock offering, while the company’s founders, early investors and employees own much of the rest.

Google, however, sold only about 7 percent of its stock, or 19.6 million shares, in its Aug. 19 debut.

The number of shares outstanding could change on Tuesday, when Google insiders will be permitted to sell as many as 39 million more shares. Until this week, they were forbidden to sell under the lockup period dictated by securities law.

“Many have posited that the stock has scooted up the way it has because there’s just not enough supply,” said John J. Kelley III, who, as the director for the corporate finance practice group at the law firm King & Spalding, has worked closely with companies in the process of going public. “So as more supply comes on, the speculation is that the price is going to get beaten down.”

Generally, companies do not allow insiders to cash in any shares until six months after the public offering.

But Google, ever the iconoclast, allowed its employees and investors to sell large portions of their holdings well before six months had passed.

It established five deadlines, including one on Sept. 2, when 4.7 million shares were freed up for sale. At that time employees were allowed to sell 5 percent of their vested stock. The share price held steady then for about a week, then began to rise. They will be permitted to sell an additional 10 percent of their holdings at the 90-day mark, on Tuesday.

On Dec. 16, 120 days after the public offering, 25 million more shares will become eligible for public sale, and another 25 million shares may be sold on Jan. 15. On Feb. 14, all legal restrictions on the remaining 177 million shares will be lifted.

“We have never seen selling of this magnitude so soon after an I.P.O.,” said Linda Killian, who analyzes new stock offerings at Renaissance Capital in Greenwich, Conn.

What impact this potential flood of shares into the market will have on the stock price is anyone’s guess – in no small part because Google’s staggered plan for allowing insider sales is so unconventional.

“Historically, we typically see a couple of percent drop in the stock price in the week the lockup expires,” said Jay R. Ritter, a professor of finance at the University of Florida who has done consulting work for Google. “But in this case it’s different, given this rolling lockup situation.” Presumably, Professor Ritter said, the staggered sale of stock “will minimize whatever price impact might otherwise be there.”

Barry Randall, who runs the First American Technology fund, a mutual fund that owns 4,700 shares of Google, is inclined to agree, noting that the trading volume on Google has averaged 12 million shares a day in recent weeks. “In that kind of dynamic, having more shares is a good thing rather than a negative thing,” Mr. Randall said. “Obviously, you don’t want a lot of shares dumped on any single day, but the volume of trading indicates that demand continues to outstrip supply.”

Yet to John Tinker, an analyst who covers Google for ThinkEquity Partners, an investment bank in San Francisco, the answer depends on how many shares hit the market this week. “The stock has more than doubled from when it came public,” Mr. Tinker said. “I’m sure there’ll be a big temptation to sell.” Google’s stock sold originally at $85 a share, and closed Friday at $182, a 114 percent rise in three months.

Wall Street is sure to be watching Google’s founders, Sergey Brin and Larry Page, for signs of confidence.

The two men each own about 38 million shares. So far each has sold a little over $40 million in stock. But if either starts to sell a significant portion of their holdings, worth a total of $14 billion at Friday’s closing price, the markets would take note.

“If they start selling, that starts to affect people’s perceptions,” said Tim Loughran, a professor of finance at the University of Notre Dame who studies initial public offerings. “You can spin this as a positive thing,” because an increase in supply can give more investors the opportunity to buy Google stock. “But on the flip side,” he said, “if insiders start selling, that can be perceived as a really bad sign.”

Two venture capital firms, Sequoia Capital and Kleiner Perkins Caufield & Byers, will have a total of about 4.5 million shares released from restrictions and are likely to sell. “Once they can, the venture capitalists start liquidating,” Ms. Killian said. “That’s what always happens, and here we’re talking about one of the very few successful deals venture capitalists have had in years.”

Whether rank-and-file employees will sell is less certain. People tended to sell the entire 5 percent when the September lockup period expired, one Google insider said, speculating that soaring home prices in the Bay Area may motivate many to cash out another 10 percent to raise a down payment.

“It may be that people won’t sell because they feel part of this family, and selling would be this breach of trust,” said Mr. Kelley of King & Spalding. “It’s possible they see themselves as Googlers who are not going to sell because Larry and Sergey are holding on, and together they’re going to see the stock go to $1,000.

“A lot of people got really burned when the bubble burst four or five years ago, because they had all of their net worth tied up in one stock,” Mr. Kelley said. “I’ve heard a lot people say that’s just not going to happen again, that when they have the chance they’re going to diversify.”


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