Street Sleuth: Google Search: - University of Connecticut



Street Sleuth: Google Search:

How Does It Value Its Shares?

By SCOTT THURM

Staff Reporter of THE WALL STREET JOURNAL

May 13, 2004; Page C1

Investors are puzzling over how to value Internet-search innovator Google Inc. for its planned stock offering.

Some clues, from Google itself: Think either $80 or $91 a share, which would value the company at $20 billion to $22 billion, before the initial public offering of stock.

Those numbers don't appear in Google's IPO securities-registration statement. But accounting sleuths say other disclosures in that document allow them to estimate how Google values its own shares.

Those disclosures relate to the stock options that Google granted to employees. Many of those options were granted at share prices that now seem ridiculously low -- an average of $2.65 a share for last year, for example. So, applying a common practice for companies going public, Google has reassessed the value of those options and recorded the difference as a compensation expense.

By digging into those numbers, Jack Ciesielski, publisher of Analyst's Accounting Observer, says he can estimate how Google itself valued its shares as recently as the first quarter of this year.

One way to unravel the numbers, Mr. Ciesielski says, is to track how much deferred compensation Google records for the "excess" value of the options -- that is, the value above the exercise price.

| | |

|DOING THE MATH | |

|[pic] | |

|[pic] | |

|One way to estimate how Google values its shares is to examine the company's accounting for stock options. Google recently reassessed the value of its options, concluding they are| |

|worth far more than the exercise prices at which they were granted. Here's how this method values the options Google issued in the first quarter: | |

|$75.384 million | |

|Deferred compensation that Google recorded to cover the excess value of the options | |

| | |

|/1,005,120 | |

|How many new stock options Google issued | |

| | |

|$75.00 per share | |

|Estimated excess value per share | |

| | |

|+ $16.28 per share | |

|The strike price, or price an optionholder would pay to buy, a share | |

| | |

|$91.28 per share | |

|What Google thinks its shares are worth | |

| | |

|Source: Analyst's Accounting Observer | |

| | |

| | |

| | |

| | |

| | |

| | |

| |

Mr. Ciesielski says Google added $75.4 million to its deferred-compensation account during the first quarter. Dividing that by the slightly more than one million options Google issued during the first quarter, he estimates that Google figured the excess value of the options at $75. Those options carry an average exercise price of $16.28. Adding the two figures together, Mr. Ciesielski estimates, Google valued its shares at roughly $91.

Mr. Ciesielski has a second method for determining how Google valued its shares that yields a different result. It relies on the Black-Scholes formula that companies use to value the options they grant to employees.

Google discloses this "fair value" for various time periods in its filing, as well as the financial assumptions it used to arrive at the value. Mr. Ciesielski realized he could run the Black-Scholes formula "backwards" to estimate the per-share value that Google must have put into the formula.

Here is how it works: Google says that, based on the Black-Scholes formula, the fair value of the options it issued in the first quarter was $67.06. Using that figure, the $16.28 exercise price and Google's other financial assumptions, Mr. Ciesielski says Google valued its shares at $80.44.

David Larcker, an accounting professor at the University of Pennsylvania's Wharton School of business, ran the Black-Scholes numbers independently and arrived at essentially the same result -- an estimate of $80 a share. Mr. Larcker labels Mr. Ciesielski's approach as "clever." Even though Google doesn't provide an estimated value for its shares directly, Mr. Larcker says, "the stock price shows up in various calculations."

Mr. Ciesielski says he can't explain why the two methods yield different results.

A Google spokeswoman declined to comment, citing the "quiet-period" restrictions around the IPO.

But in its filing Google says it relied on advice from its investment bankers, its own historical and forecast results, and comparisons to public companies to value its shares. It warns investors that the values are "inherently highly uncertain and subjective."

Mr. Larcker says it will be interesting to see if investors use the numbers derived from Google's filing in bidding for shares during the auction that Google says will help set the price for the IPO. "You would think that the numbers that are out there would be pretty close to what you'll see" at the time of the IPO, he says.

According to its filing, Google has roughly 246 million shares outstanding, meaning that the per-share estimates value the company at $19.7 billion to $22.4 billion. The IPO itself will add to that value, by issuing more shares. Google hasn't yet indicated how many shares it will issue, but companies typically add roughly 10% to their shares during an IPO. That would boost Google's total value to $21.7 billion to $24.6 billion, in the range that analysts and investment bankers have estimated.

In reassessing the value of its options, Google is following established Securities and Exchange Commission procedures. Richard Rowe, a former director of the SEC's corporate-finance division, says the agency has been requiring IPO registrants to reassess the value of historical stock options since at least the 1980s.

Mr. Rowe, now a partner in the Washington, D.C., law office of Proskauer Rose LLC, says SEC staffers adopted the practice because they found many about-to-be-public companies had issued options at unrealistically low prices, essentially transferring value to employees. "If a company granted a lot of options in the last year, the staff will ask them to justify how they accounted for them and revalue them," he says, stressing that he has no specific knowledge of Google's filing.

Write to Scott Thurm at scott.thurm@

................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download