by Steve Levy
Hypersensitive about leaks, Google worded each letter to a bank slightly differently, so that it could later identify which banks couldn’t be trusted to keep their mouths shut. “It did not stop the leaks, but we were quite comfortable we knew where they came from,” says Buyer, who added that Google cut the indiscreet parties out of the offering.
Typically, a bank would bring its heavy hitter—often its celebrity CEO—to the pitch meeting. Google demanded that it meet only with the bankers who would actually be handling the offering. The request was so unusual that some banks refused to believe it. “Goldman Sachs, Citi—pretty much all of them—said, ‘Okay, we’re going to fly in and bring Hank Paulson, we’re going to bring Bob Rubin,’” says Lise Buyer. “And I’d say, ‘I’m sure he’s a great guy, but he’s not going to do our deal—save us the time.’” Eventually, most of the banks got the message, but when Citibank showed up, there was its celebrated leader, Robert Rubin. “To be fair,” says Buyer, “he didn’t do the usual CEO grandstanding.”
Credit Suisse, which had done a great job on the questionnaire, was a dark horse that became the co–lead bank, along with Morgan Stanley, which, as Google’s team had expected, diligently answered the questions. Even though Hambrecht was known as the pioneer of the auction-based IPO, it was Morgan Stanley that developed the technology to run the Dutch auction that would determine opening prices.
Google wasn’t the easiest client. For one thing, it specified that the fees it would pay would be 2.8 percent of the sale, about half the accustomed rate. (That sent Merrill Lynch running—no way it would allow Google to set that precedent.) There were also the complications of the auction, which would take much more time and attention than the normal IPO. And finally, there was the fact that this was Google, led by two Montessori maniacs who felt compelled to question traditional methods in every way.
Instances of Google’s idiosyncrasies persisted throughout the process, beginning with the total value of shares originally to be offered: $2,718,281,828. Only the geekiest investor would understand that this was a mathematical joke, as those were the first nine decimal places in the irrational number e, known as Napier’s constant. More striking was the prospectus. Normally such a document, known as the S-1, was a fairly dry packet that laid out financials, cited risk factors, and gave a straightforward but controversy-free account of what the company was all about. Since SEC regulations were specific, the document usually read as if it had been written by financiers and vetted down to the last dependent clause by lawyers—because it was.
Page and Brin instead drafted a personal letter to potential investors explaining in simple language why Google was special and therefore would have a different relationship with its shareholders than other companies did. It was in the spirit of the famous essays by Warren Buffett in Berkshire Hathaway’s reports, as well as the “Owner’s Manual” supplied by Buffett to his shareholders. Buffett’s dispatches were distinguished by a homespun clarity and a core belief in a nourishing, steady-as-she-goes approach to the fundamentals of business. “We wanted to get people to know what to expect,” says Brin. Brin and Page were so wed to an intimate missive, as opposed to committee-created documents, that they decided that the letter would be written mainly by one person, with the two founders alternating each year. The initial edition would be Larry Page’s message.
“Google is not a conventional company,” began Page’s letter, released on April 29, 2004. “We do not intend to become one.” It was an explicit warning to potential shareholders: fasten your seat belts!
In his “Owner’s Manual to Google,” Page put front and center the unofficial motto of Google, “Don’t be evil.” “We aspire to make Google an institution that makes the world a better place,” he wrote. “We believe strongly that in the long term we will be better served—as shareholders and in all other ways—by a company that does good things for the world even if we forgo some short-term gains. This is an important aspect of our culture and broadly shared within the company.”
The “Don’t be evil” passage generated anxiety within Google’s IPO team. “It was very clear that cynical Wall Street was going to rake them over the coals,” says Lise Buyer. But once Buyer got past the weirdness of it, she came to agree with Page’s approach. “What that letter did more than anything was, it really told people how the company thinks and operates,” she says. Even five years later, Google CFO Patrick Pichette would tell potential shareholders, “Read the founder letter, and if you’re comfortable, buy stock.”
But when Google’s S-1 appeared, the first-day news wasn’t Larry’s letter but the spectacular financial results that followed. “The day the prospectus was available to the public, it was ‘Holy shit, somebody cracked the code of the age-old unsolved problem of the Internet,’” says David Krane. Newsrooms around the country began to deploy journalists to get to know this suddenly important force in global business. Google rebuffed the deluge of requests from journalists seeking context and color. It was the beginning of the quiet period mandated by the SEC.
Cindy McCaffrey was almost sick with frustration. She thought that the quiet period was some outdated artifact from the 1930s, when people barely had telephones and information dropped to outsiders was unlikely to spread. “Not being able to respond bred a permanent pattern of inaccuracy in Google coverage,” says David Krane, years after the fact. “We’re still digging out of that hole to some degree. And it had a tremendous impact on our founders and even our CEO on how they look at journalism and look at media.”
Meanwhile, the Securities and Exchange Commission was unimpressed by the charms of Page’s “Owner’s Manual.” “Please revise or delete the statements about providing ‘a great service to the world,’ ‘to do things that matter,’ ‘greater positive impact on the world, don’t be evil’ and ‘making the world a better place,’” they wrote. (Google would not revise the letter.) The commission also had a problem with Page’s description of the lawsuit that Overture (by then owned by Yahoo) had filed against Google as “without merit.” Eventually, to resolve this issue before the IPO date, Google would settle the lawsuit by paying Yahoo 2.7 million shares, at an estimated value of between $260 and $290 million.
That set a contentious tone that ran through the entire process. The SEC cited Google’s irregularities on a frequent basis, whether it was a failure to properly register employee stock options, inadequate reporting of financial results to stakeholders, or the use of only first names of employees in official documents. It acted toward Google like a junior high school vice principal who’d identified an unruly kid as a bad seed, requiring constant detentions.
From Wall Street, investment Brahmins waged a back-channel attack on Google’s prospects. Their apparent intention was to drive down the price of the opening bid for the stock. Financial journalists—still feeling sheepish for having overplayed Internet companies during the late 1990s bubble—took the bait and filed innumerable stories expressing skepticism about the latest web darling. Google never figured out an effective way to respond.
An integral part of a public offering is a “road show,” during which company leaders pitch their prospects to bankers and investment gurus. Brin and Page refused to see themselves as supplicants. According to Lise Buyer, the founders routinely spurned any advice from the experienced financial team they’d hired to guide them through the process. “If you told them you couldn’t do something a certain way, they would think you were an idiot,” she says.
The tone of the road-show presentations was set early, as Brin and Page introduced themselves by first names, an opening more appropriate for bistro waiters than potential captains of industry. And of course they weren’t attired like executives—the day of their presentation of Google’s case to investors was one more in a lifetime of casual dress days for them. Google had prepared a video to promote the company, but viewers considered it amateurish. It was poorly lit and wasn’t even enlivened by the customary upbeat musical sound track. Though anyone
who read the prospectus should have been prepared for that, some investors had difficulty with the heresy that Google was willing to forgo some profits for its founders’ idealistic views of what made the world a better place. On the video Brin cautioned that Google might apply its resources “to ameliorate a number of the world’s problems.”
Probably the low point of the road show was a massive session involving 1,500 potential investors at the Waldorf-Astoria hotel in New York. Brin and Page caused a firestorm by refusing to answer many questions, cracking jokes instead. According to The Wall Street Journal, “Some investors sitting in the ballroom began speculating with each other whether the executives had spent any time practicing the presentation, or if they were winging it.” The latter was in fact the case—despite the desperate urging of Google’s IPO team, Page and Brin had refused to perform even a cursory run-through. Things went better on home turf a week later, at a presentation before a hundred Silicon Valley investors at San Francisco’s Four Seasons Hotel. The best sessions of all were smaller meetings where a single member of the triumvirate would present. Lise Buyer accompanied Sergey on one of those trips and thought he was brilliant, connecting with investors one-on-one as he explained the way Google’s business worked.
But that was a rare moment of connection in a process hampered by investors’ failure to understand Google’s unusual business model. Despite Google’s release of its financials, Wall Street seemed to have no idea how the company really operated and what plans it had for the future. “We were asked on the road show why we were spending so much in capital,” says Schmidt. “And Larry and Sergey looked at each other as if to say ‘They don’t know yet!’” Had the founders been candid, they would have explained that the capital was being spent on engineering talent, fiber-optic cables, and data centers, creating a nearly insurmountable advantage over their competitors. But they kept that to themselves, even at the expense of failing to persuade investors to buy the IPO.
As the auction date approached, an accumulation of further missteps hounded Google. Some of them involved the auction process. Google had spent a lot of time working out the details, using a team that included its chief economist, Hal Varian, and experts from academia. The company had come up with a way to implement a Dutch auction, in which the final bid—the amount paid by all winners—would be the lowest bid that would raise the required amount of money to buy the offered shares. Meanwhile, Page pushed for a test that prospective investors would be required to pass: answer three questions about Google, just to make sure that you understand the company and aren’t just making a trendy bid. It was the closest he could come to demanding potential investors’ SAT scores. The SEC nixed the idea.
Google had considerable experience with pleasing users, but in the case of the auction, it could not create a simple interface. SEC rules demanded complexity. So the Google auction was a lot more complicated than buying Pokémon cards on eBay. People had to qualify financially as bidders. Bids had to be placed by a brokerage. If you made an error in registering, you could not correct it but had to reregister. All those problems led to a few postponements of the start of the bidding period.
But the deeper problem was the uncertainty of Google’s prospects. As the press accounts accumulated—with reporters informed by Wall Streeters eager to sabotage the process—the perception grew that Google was a company with an unfamiliar business model run by weird people. A typical Wall Street insider analysis was reflected by Forbes.com columnist Scott Reeves, who concluded that Google’s target price, at the time pegged to the range between $108 and $135 a share, was excessive. “Only those who were dropped on their head at birth [will] plunk down that kind of cash for an IPO,” Reeves wrote.
On August 12, just as the bidding process was about to begin, Cindy McCaffrey took a call from a reporter asking about a press release he had just received from Playboy magazine, whose September issue was just about to hit the stands. It featured a long interview with “The Google Guys.”
McCaffrey knew that Playboy had done an interview with Brin and Page before the quiet period began. Google’s PR people had been eager for exposure beyond the usual tech magazines and publications with weighty business sections, and had convinced Page and Brin to cooperate with Playboy. On April 22, the writer, David Sheff, had gone to the Googleplex for the first of what he believed would be several sessions. He’d seen this first interview as an icebreaker and held off on some of the more personal or critical matters that he planned to bring up when he’d established a rapport. He’d assumed he would return in a few days for more interviews and a photo session. But when Sheff called Google soon after his visit, he got nothing but evasion. A week later, Google filed its prospectus, and the quiet period officially began. Google told Sheff that if he wanted more time with Larry and Sergey, he’d have to wait until after the IPO was completed. McCaffrey assumed that the project was on hold. In any case, Larry and Sergey didn’t want to sit down again with Playboy. The interview had been pleasant enough, but they felt that a single session had dispatched their obligation.
Sheff’s editor, Stephen Randall, thought that the idea of more sessions was moot. “We had an opportunity to be more newsworthy because of the IPO,” he says. “So I decided to crash it through, even though we only had a partial interview.” Playboy thus had the Google Guys interview no one else could get. “It was a very, very big day for us,” says Randall. “You couldn’t have asked for anything better.”
For Google, though, it was a disaster. Even Google’s finance team was stunned. Out of nowhere a photocopy of the issue appeared—the cover story promised “The Women of the Olympics—12 Pages of Spectacular Nudes”—and was being passed around like a social disease. “It made us look like idiots,” says Lise Buyer. Google had to contact the SEC to clarify what seemed like a violation of its rules. For a while it looked as though the entire IPO was in jeopardy. Google came up with a compromise that defused the situation: it included the entire Playboy interview as an amendment to the S-1. Still, it was yet another indication that these people asking shareholders for billions of dollars looked like a bunch of idiot savant kindergartners. “It has no bearing on my plans to bid in the auction,” one banker told The Wall Street Journal. “But it’s certainly consistent with the lack of adult supervision that seems to go on there.”
All the fumbles, postponements, and adjustments took their toll. Articles from that summer had headlines like “Whiz Kids’ Blunders Blacken IPO’s Eyes,” “Google’s Way May Not Be the SEC’s Way,” and one that summed it all up, “How Miscalculation and Hubris Hobbled Celebrated Google IPO.” It became obvious that the targets Google had set for the auction would not be met. Brin and Page cut in half the number of shares they planned to sell. Kleiner Perkins and Sequoia announced that they wouldn’t sell any of their shares. (They feared the IPO price would be lower than what their shares would fetch on the open market later on.) And the projected price range for winning bids fell from the range of $108 to $135 per share to an estimated $85 to $95. Essentially Google’s projected value fell by about 30 percent, to $25.8 billion.
Google stumbled to the finish line on August 19. When the computers calculated the explicit bids, it was determined that the opening price would be $85—every bidder who submitted that price or more would be allocated shares at that sum. It was much higher than the opening price of a typical IPO but less than Google had hoped for.
Sergey stayed in Mountain View that day. “I was tired and didn’t want to take the red-eye,” he later explained. Instead, he did some code reviews. “This is a great opportunity to make a lot of decisions without Larry or Eric to disagree,” he joked to his colleagues at the Googleplex. Charlie Ayers served ice cream in Building 40 all day. In New York City, Larry Page, wearing a suit purchased at Macy’s, rang the opening bell at NASDAQ with Eric Schmidt, then went to Morgan Stanley to see how the stock would move. It finished the day at $100, quieting the doubters—somewhat. The Wall Street Journal’s headline was “Go
ogle Shares Prove Big Winners—For a Day.” (In fact, Google stock would never be that low again.) Page and Brin each ended the day worth $3.8 billion.
Those people dropped on their heads at birth who were dumb enough to bid more than $100 for the shares did pretty well. The shares they purchased for $85 realized an 18 percent profit in a single day. Though Wall Street had gotten its licks in, Google could claim success insofar as the auction process gave equal access to all investors. None of that mattered in the ensuing months and years as the stock took off. The stock price climbed to $280 a year later, $383 a year after that, and a little more than three years after the IPO, topped $700.
The Monday after the IPO, Schmidt hosted a postmortem at the weekly executive meeting. “Everybody yelled and screamed for a while,” he says. After all the venting, Schmidt turned to Omid Kordestani for his comment. In 1999, Kordestani had spurned other opportunities to join two brash Stanford kids, and now he was unfathomably rich. Maybe a more successful IPO would have made him a little richer at that very moment, but now his financial fate depended on what happened to the share price, not the opening bid. His response played on a convention of the Olympics, currently under way in Athens.
“I would like to declare the closing of the IPO,” he said.
Schmidt was delighted. “I hereby declare the IPO is over,” he said.
The Playboy interview, the SEC, the sniping from Wall Street—none of it mattered now.
