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Google Slashes IPO Price, Plans Debut Thurs.

UPDATED: Search engine darling Google has slashed the price of its long-awaited public offering by about 30 percent to between $85 and $95 per share and plans to sell fewer shares.

In addition, federal regulators gave the company the all-clear to proceed with its offering. Late Wednesday afternoon, Google said the Securities and Exchange Commission had declared its registration effective for its IPO, and that it expected to trade on the Nasdaq sometime on Thursday.

When it does, the lowered price range suggests that demand for its IPO fell short of the earlier price range of between $108 to $135 per share.

The lowered price and number of shares would reduce the amount of cash it intends to raise to about $1.86 billion, based on the higher range of the 19.6 million shares it now plans to sell. Google's prior filings had anticipated issuing about 25 million shares. At the prior price range it was looking for about $3.3 billion.

According to its latest prospectus, Google still intends to offer 14.1 million shares of common stock. But existing shareholders now plan to offer 5.5 million shares, instead of the 11.6 million stockholders planned for sale before.

Google's price has supposedly been set during a Dutch auction of the IPO shares, an unusual process that's been used only a few times by U.S. companies. Specialty coffee purveyor Peet's Coffee & Tea and online gift retailer Red Envelope are among the companies that have used the process.

In a Dutch auction, would-be investors are invited to bid for shares in a closed process: They offer to buy a number of shares for the price they think the shares are worth, but they can't see anyone else's bids. When the auction closes, the underwriters figure out the highest price at which all the shares can be sold. Investors who bid at or above that price will receive all the shares they ask for.

This process has two advantages --at least on paper. The stock is sold at the highest price investors will pay, so the issuer takes in more money. And, because the process is fair and open to all, retail investors can compete for IPO shares along with institutional investors, who, in traditional IPOs, may be the only ones cut in.

In accordance with SEC rules, Google had to set a price range for the stock before the auction. Its earlier range of $108 to $135 per share, was criticized as unrealistic by some analysts; others said it was bad strategy.

"They should have priced it lower, and then generated hype to drive the price up," said stock analyst and author Melanie Hollands.

The regulatory filing process and intense media scrutiny brought to light numerous gaffes made by the search leader. Google doesn't have clear rights to its name, nor to the trademark for Gmail, its free Web mail service.

Google revised its S-1 regulatory filing almost on a daily basis. The company warned that the SEC and some states had launched informal inquiries into whether an interview with company founders Sergey Brin and Larry Page that ran in Playboy magazine during the auction violated quiet period rules.

That same revision provided more details about why Google will be forced to offer to buy back stock and options given to present and former employees and contractors. Google had reached the limit for unregistered stock, but wanted to keep passing it out. Therefore, the company decided to take a chance that further options might be covered under a different section of the rules. Just in case they're not, Google will offer to buy back up to $25.9 million worth at 20 percent of their strike price -- after the IPO, when recipients will have a very good idea of what they're worth.

While Google may have had good intentions for choosing the Dutch auction process, the IPO is likely to give auctions a bad name.

"This IPO has been a circus from the outset," Hollands said. "The Dutch Auction. The Unabomber-style manifesto. Breaching rule 701 for the allocation of shares and stock options."

Hollands also said there was a lack of interest in the IPO from both institutional and retail investors, something that was widely rumored but unsubstantiated. Google did extend the registration period for bidders, which some saw as a sign that registration was lagging. However, the stall might also have been due to the brokerages' need for more time to put order-taking procedures in place.

According to comScore Media Metrix, which tracks traffic to Web sites, the number of visitors to ipo.google.com site never reached its reporting threshold of 50,000 a day.

The real measure of GOOG will come in the next few weeks, as Googlemania gives way to business as usual on the Street. That's when the market will make clear the true value of the stock.

"It will be a volatile stock," said Tom Taulli, author of Investing in IPOs. First, hedge funds and short-sellers will have their way with it, selling it off to bargain hunters who eschewed the auction. "If you're a retail investor playing with professionals," Taulli said, "you'll get crushed."