How to Misprice Your IPO

It's hard to remember, but a year ago there were actually some Wall Street wags who were predicting that Google's(GOOG) initial public offering would be a dud.

The investment community's unease with the Internet search engine's unusual method for selling shares and the poor environment for IPOs forced the folks at Google to scale back their ambitions dramatically. The IPO eventually priced one year ago today at $85, a far cry from the $135 a share Google's founders originally had hoped to get.

Doom-and-gloom predictions for the stock abounded as trading began on Aug. 19, 2004. To put it mildly, the pessimism has proven unfounded.

Since their debut, shares of Google have been a runaway hit, rising 18% on the first day of trading and eventually more than tripling in price. On Thursday, shares of Google were trading around $278.

Google has become such a Wall Street darling that the company has decided to go back to the well. The day before the anniversary of its IPO, the company filed a registration statement with the Securities and Exchange Commission to sell 14.2 million shares in a bid to raise an additional $4 billion from investors. That's a little more than twice as much cash as Google raised a year ago.

Investors didn't seem too disturbed by the potential dilutive impact of so many new shares coming into the market. In Thursday trading, shares of Google were off just 2.3% after the announcement.

The spectacular run in Google, of course, raises the question of whether founders Sergey Brin and Larry Page should have stuck to their guns and pushed harder for the $135 a share IPO price.

In hindsight, it's easy to say they should have, even if you doubt the stock should be trading at a price that's 38 times next year's estimated earnings (after all, the $85 IPO price is only about 11 times the current 2006 estimate). But the truth is, Brin and Page have no one to blame but themselves for the relative lowball pricing of Google's IPO, which ended up leaving more than $1 billion on the table.