TCS Daily


Ready or Not, Here It Comes

By Dominic Basulto - August 16, 2004 12:00 AM

Ever since it filed for its IPO nearly three months ago, Internet superstar Google has struggled with a staggering reversal of public opinion. After months of hype and increasingly fervent speculation about what a Google IPO would mean for the tech sector, investor interest in the deal appears to have cooled markedly. By opting for a Dutch auction IPO rather than a traditional IPO, Google hoped to make its shares more available for the "little guy," while at the same, weakening the power of Wall Street investment banks. It was all part of a plan to change the playing field for tech IPO deals. Unfortunately, things haven't exactly gone as planned...

Institutional investors are now busy talking down the deal, retail investors are complaining that the target share price ($108 to $135 per share) is too rich and everyone else has been befuddled by an overly complex auction format. Meanwhile, the Nasdaq has dropped nearly 10% since the announcement of the Google IPO deal and market skeptics are reassessing some of Google's optimistic growth projections.

However, investors concerned about a triple-digit share price -- the highest-ever for an IPO -- would be well-advised to check out the share price of Berkshire Hathaway. Yep, the same Berkshire Hathaway run by the Oracle of Omaha himself, Warren Buffett. The company's Class A shares now trade around $87,110 -- but the sky-high stock price hasn't diminished investor demand for the company. The link between Google and Berkshire Hathaway is little coincidence -- during the preparation of the offering prospectus, Google repeatedly cited the folksy ways of Berkshire Hathaway. Both companies will have two classes of shares with unequal voting rights; both companies are strongly opposed to future earnings forecasts; and both companies dismiss the logic of potential stock splits.

So, what -- if any -- lessons does the Google IPO deal hold for tech companies hoping to launch an IPO in the not-too-distant future?

First of all, there's never a "good time" to go public. The IPO window can slam shut with terrifying intensity, with signs of market volatility appearing faster than the latest hurricane warnings along the Atlantic seaboard. Forget Tropical Storm Bonnie or Hurricane Charley -- here comes crude oil at over $44 a barrel, lackluster quarterly earnings reports, sluggish employment numbers, and heightened fears over terrorism in New York and Washington. During the first week of August, seven companies either canceled or delayed their initial public offerings, citing "adverse market conditions." The timing of an IPO deal in the waning days of summer may not be perfect, but Google realizes that a company can't sit around forever, trying to time the market and sneak through the mythical IPO window.

Moreover, tech companies -- regardless of size or market clout -- can not afford to turn their backs on Wall Street. The two co-founders of Google tried to do exactly that: by opting for an auction format IPO instead of a traditional IPO, Google essentially cost Wall Street tens of millions of dollars in underwriting fees. Moreover, Google appears to have intentionally broken some of the unwritten rules of investor road shows: in meeting with institutional investors, Google was at times careless, flippant and even arrogant. When asked what differentiates Google from Yahoo, the company had a simple response: "Our product is better than theirs. Next question..."

Finally, tech stocks are no longer 'story stocks.' During the late 1990's, tech companies went public at a dizzying pace, often with no earnings -- and sometimes even without any revenue. Hence, the birth of the 'story stock': investors learned to create fantastic stories about future market opportunities, absurd growth rates and Next Big Thing technologies. Investors bought the story, not the stock. The experience of Google shows that investors are keeping their eyes on metrics like earnings, revenue, margins and market share. They intend to hold Google to the same standard as other companies, and thus, are questioning facts like an implied P/E ratio of 190. The long-term future of "paid search" looks promising, but that doesn't mean that investors can't sneak a peek in the rear view mirror and see the likes of Yahoo and Microsoft rapidly gaining ground.

Here's hoping that the $3 billion Google IPO succeeds. Most of the "trash talk" about the deal emanating from institutional investors appears to be more of an attempt to snag shares of the company at a cheaper auction price than any real concerns about the company's underlying fundamentals. Meanwhile, miffed investment bankers can be excused (but only this one time) if they aren't exactly thrilled about being pulled along for a ride that they can't seem to control. A successful Google IPO, of course, would be a tremendous boost to a tech sector that has struggled of late. As the bidding process proceeds, potential investors only need to keep in mind a single question: "Am I feeling lucky now?"


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