Perspective: Google this: disaster

The IPO lexicon has a myriad of colorful words, such as "green shoe," "blue sky," "flipping" and "red herring." There is a new word we can add: GOOG-plosion.

Definition: IPO disaster.

Ok, perhaps the Google IPO is not an unmitigated disaster. After all, it was no fault of the company that Nasdaq corrected during its road show and Net stocks plunged.

Yet Google has certainly committed a variety of major blunders. While no initial public offering is perfect, investment banks such as Morgan Stanley and Credit Suisse First Boston (which are co-managing the Google deal) have tremendous experience in the IPO process and rarely goof.

As everyone knows, it is Google's two 30-something founders who are running the IPO circus. True, their management techniques have been hugely successful for its search engine business--but these skills do not translate well to the tricky business of raising billions of dollars. This is something that should be left to the pros.

It is absolutely insane to conduct a mega IPO after mid-August.

A couple of the pros, including Merrill Lynch, have opted out of the Google IPO. True, a cynical person would say the reason is that these banks considered the fee structure to be meager (it may be less than 2 percent, according to recent speculation). However, as seen in the past month, there are other good reasons.

First of all, it is absolutely insane to conduct a mega IPO after mid-August. Would it be smart to sell ice cream in January? Not if you are in Massachusetts.

In other words, the IPO market involves seasonality. Simply put, many investors are on vacation in August. Interestingly enough, the Net trackers at Nielsen/NetRatings indicated that the traffic to Google's IPO information site has been tepid at best. In fact, for my site, CurrentOfferings, I purchased the search phrase "google ipo" from, well, Google. Click here, and you can see that the impressions are lackluster.

Another problem is that the initial price range Google set was at the high end of its valuation. In a traditional IPO, it is a common strategy to be conservative at first and then to increase the range, as the IPO gets closer to competition. This creates a sense of frenzied demand.

It also does not help that Google's management has been very reluctant to provide information and answer questions during the "road show" presentations to potential investors. Information is oxygen for investors. If it is lacking, investors will look for alternatives or, in many cases, think about worst-case scenarios.

But perhaps the biggest problem is the use of the Dutch auction, which sets a share price based on potential investors' bids. Again, the Google founders think that Wall Street's traditional approach is, well, "evil" and that the IPO process should be democratized.

Democracy can be messy, and a little authoritarianism can be a good thing--at least for IPOs. You're not talking about politics (though the founders may think that their IPO is a social movement). An IPO is merely a business transaction.

The major irony is that Google has caste system for its shares. Investors can buy Class A Shares, which give only one vote per share. The Class B Shares give management of Google 10 votes per share. Yes, in the strange version of Googlian democracy, some people are more equal than others.

It also does not help that Google's management has been very reluctant to provide information and answer questions during the road show.

The traditional approach to IPOs actually works quite well: Dole shares to major institutions, which makes the capital-raising process much more efficient than allowing many investors--of all sizes--make bids. More importantly, the underwriters can underprice the IPO, which should create a pop on the first day of trading. In other words: To get investors into a deal, you need to make it worthwhile. It's that simple.

For the most part, investors have quickly realized that there is little incentive to participate in the Dutch auction. It makes more sense to just wait. Why go through the brain damage of bidding? It's too much work for no reward. Besides, many professional investors have no experience with Dutch auctions. And just imagine what the frustration level will be for individual investors.

Moreover, a Dutch auction is even more problematic in declining markets. Investors may think: Will my current bid turn out to be too high?

Thus, we are seeing an IPO "perfect storm" for the deal of the century.

With little information in the marketplace regarding Google, it is only natural that conspiracy theories are swarming. One speculation is that investment bankers are surreptitiously trying to undermine the Google IPO. Why? A Dutch auction is a threat to heart of the IPO money machine.

I have my own conspiracy theory. Last week, a reporter asked me, given heavy negative buzz on the Google IPO, if there were any way Google could slow things down and wait for things to get better.

My response: "Violate the quiet period. When this happens, the SEC requires a cooling-off period."

IPOs involve many arcane regulations, extending back to the 1930s. When a company is in the IPO process, it must not hype its operations--a quiet period takes effect.

This week, Playboy Magazine published an interview with the founders of Google and, of course, there were calls that the company violated the quiet period.

True, the interview occurred several months ago. Yet it is typical for a publication to honor a company's wishes not to publish a piece that would violate the securities laws. Could Google be permitting the release of the interview on purpose?

Ok, this seems a bit crazy. But within the twilight zone of the Google deal, anything is possible.

Biography
Tom Taulli is the co-manager of the Oceanus Value Fund and also the founder of CurrentOfferings, a site that focuses on corporate finance. He has written seven books on finance, including "Investing in IPOs" and "The Complete M&A Handbook."

More Perspectives

[Not Bugged]

You're not thinking Google...

An IPO is usually meant to raise capital for the company. You forget that Google DOES NOT NEED or WANT to raise capital.

It is merely going through an IPO because it's gotten to the point where as a private company, it had to file with SEC anyways.

You're just thinking like the "old school" investors.

Oh, and BTW, many of Google's fan's are technically literate, They can easily figure out what a Dutch auction entails. They like Google because they like it, not necessarily because they want to make money. They'll buy to own a piece of Google, thus they will not necessarily hit Google's IPO info site.

I never read it, neither has any of my colleagues.
Again...you're thinking like old school banker, just out to make money.

Many of "us" think like Sergei and Larry. We just want to do no evil. The cost of a few shares is incidental (think about how much money most gamers blow on customizing their gaming rigs).

We are the type of investors Google wants to attract. We'll just buy and hold, trust them to run the show "right" and it'll be much less volatile.

Google is so twentieth

Google is one of the last remnants of the Internet Bubble. It's great, I love the features, but the whole business model---well, who knows? The sloppy business with Playboy, the dutch auction to try to make sure that Google gets to keep the whole first-day pop instead of sharing it with the individuals and institutions that buy the stock---it's all indicative of a certain mindset.

Throughout the end of the Bubble the message from tech people and startup founders was always, we could have done this right, if only---but really, there was no "if only." The problem wasn't the way they played the IPO process, the problem was that they wanted to play the process in the first place. The IPO process is designed to make sure that you can't cash out before the true value of your stock is apparent. It works pretty well.

I haven't followed the Google road show, but it wouldn't surprise me to learn that they've been a bit murky about answering detailed questions. It's the Gold Rush mentality---they're not selling product, they're just selling stock.

Maybe they'll become profitable, but they seem a bit too like all of those other Bubble companies to make me personally confident of it. Maybe they're a "new kind of company", but to me, they just seem like the last of twentieth-century Silicon Valley whiz-kid arrogance.

[Mondoh!]

Thorst - You ignorant slut

What an idiot:

An IPO is usually meant to raise capital for the company. You forget that Google DOES NOT NEED or WANT to raise capital.

It is merely going through an IPO because it's gotten to the point where as a private company, it had to file with SEC anyways.

You're just thinking like the "old school" investors.

Oh, and BTW, many of Google's fan's are technically literate, They can easily figure out what a Dutch auction entails. They like Google because they like it, not necessarily because they want to make money. They'll buy to own a piece of Google, thus they will not necessarily hit Google's IPO info site.

I never read it, neither has any of my colleagues.
Again...you're thinking like old school banker, just out to make money.

Many of "us" think like Sergei and Larry. We just want to do no evil. The cost of a few shares is incidental (think about how much money most gamers blow on customizing their gaming rigs).

We are the type of investors Google wants to attract. We'll just buy and hold, trust them to run the show "right" and it'll be much less volatile.

Dude...You are the worst type of idiot on the planet...the ones who don't know they're idiots. At best you are naive...If you are the type of investor they wish to attract. then they deserve what they get...to tank their IPO simply because they are greedy enough to ask idiots like you to trust them to...how did you put it?

"We are the type of investors Google wants to attract. We'll just buy and hold, trust them to run the show "right" and it'll be much less volatile."

So investors aren't supposed to ask questions of those whom they invest with? Are you nuts?

Let's rephrase:
"We are the type of investors criminals want to attract. We'll just buy and hold, trust them to run the show "right" and it'll be much less volatile."

And the criminal & civil & stockholder complaints will be much less volatile also. Just because it's quiet makes it OK?

Spoken like a true Republican.....

Sincerely,

Armando Canales

Taulli is an idiot

Did the major investment banks pay you to write this article? I've never seen a more blatant hatchet job in journalism. It's clear that the institutions are pissed that they're not being given free bene's that they're normally accustomed to and it's clear that the investment banks are pissed that their collusive pricing scheme is getting chopped at the knees.
Just because your little keyword purchase scheme isn't going your way doesn't mean that this process is flawed.
What is clear is that the Google IPO will be the MOST democratic and fair distribution of shares ever executed. What's not clear is why you would attempt to chop it off at the knees.

[anthonycea]

Why is he an idiot, do you own Google stock Sir?

Larry and Sergey are the idiots Sir, if they would have let professionals handle the IPO they would not have this disaster on their hands.

PO are you getting some of the Millions from the IPO as an insider Sir?

Is that why you say he is an idiot.

What is Google really offering everyone, another Netscape?

Should folks just sit back and fund this Titanic IPO and not ask any questions?

Should we all jump for joy to hold classless "class A" shares with one vote to the Insiders "class B" shares with 10 votes?

If anyone wants to really learn more about the Google IPO look at the following pages

http://www.webcenter.squarespace.com

We are not all insiders like you PU, or was it PO?

[anthonycea]

See why Pierre Omidyar calls the author an IDIOT

Pierre Omidyar one of the original investors in Google is mad at the author for an objective story. Why is he mad? Will he lose Billions if the IPO does not go off as planned?

See the truth about why Mr. Omidyar is mad.

Find the first link "READ ABOUT THE INSIDERS WHO GAIN THE MOST FROM THE GOOGLE IPO" at the following URL

http://www.webcenter.squarespace.com/google-ipo/

I buy ice cream all year long.

Even the shallowest analysis of the last 5 years suffices to demonstrate that the tech market structures favour short-term gains over long term (earnings management comes to mind). It is true that CSFB, Morgan Stanley and their likes have tremendous experience in IPOs. That tremendous experience primarily benefits CSFB, Morgan Stanley etc. The Google founders are well justified to question how the common financial practices will benefit their company in the long term.

An investor who is thinking ?ice cream cone? is probably not the right investor for Google. In 10 years, it won?t matter much that it IPOed in August or in February.

Side note:
Out of curiosity, I looked at the underwriters of the first 3 companies described in the book ?F?d company?:

Morgan Stanley was the underwriter of pets.com
CSFB was the underwriter of Kozmo
Goldman Sachs was the underwriter of Webvan.

While the establishment ? investment bankers and analysts alike - raise FUD around the Google IPO, they shift the public attention away from their own record. If all goes well, everything will be forgotten e in 25 years and there will be another bubble?

[Mondoh!]

You're all wrong - Follow the money...

Guess what?

None of it is going in yer pocket...

You're naive at best - Stoopid at worst

Armando Canales

[FisherKingKQJ]

Google IPO blunders art.

If you're going to make mistakes it's better to make them in the off-season in preliminary training. The other CNet correspondent had the insight. The fact is: complex deals like the dutch auction always drag out anyway. I think Google are only trying to make it work for them - the business model is much better than the software, IMO.