Google: The Scorecard

By Bill Mann
The Motley Fool
August 23, 2004

In the end, we have another public company, one of 6,000 or so. For all of the yammering about the meaning, strength, and success or failure of the Google (Nasdaq: GOOG) IPO, at the end of the day we have yet another publicly traded company, one that will have elements about it that are attractive and elements that are not.

I have to admit to being somewhat surprised by the strength of Google's shares since its IPO at $85 on Thursday -- at current ticks the company has risen some 27% from the level at which it priced its IPO shares. That's a far cry from the 700% that IPO star VA Linux generated several years ago, but a quick look at the biggest IPO pops in history will show you something dramatic -- almost none of the companies trade anymore, and no, they weren't acquired.

People thought I was crazy for saying this in early 2000, but I'll say it again now: "Successful" IPOs of that flavor are disasters.

Google's IPO, even though it went off below its original target price, was a success. Anyone who has read this column for any length of time knows that I have been very critical of where the company priced its IPO, and so, yes, I think that the company's share price at the moment is totally unsustainable. But Google managed to raise $1.7 billion, putting it well ahead of Infonet (NYSE: IN) as the largest technology IPO in history.

But did you know that Google is only the third largest IPO of the year in terms of money raised? Both Genworth Financial (NYSE: GNW) and Assurant (NYSE: AIZ) were bigger. Did you see their founders on magazine covers? Did they receive hyperactive coverage on every news outlet in existence? They did not, and the reason they didn't is that they don't have the consumer recognition that a Google does. One would think that Google was the largest public offering in the history of mankind. It wasn't. It may, however, have been the most interesting.

For posterity's sake, Google's raise made it the 25th largest American IPO of all time. Had it been able to sell all of its shares at the high end of the range it originally identified -- $135 per stub -- it would have been the eighth largest. Tell me how many of these IPOs got the public as hot and bothered as Google: AT&T Wireless (NYSE: AWE), $10.6 billion; Kraft Foods (NYSE: KFT), $8.7 billion; UPS (NYSE: UPS), $5.5 billion; and on down we go. Heck, Genuity, sold for parts to Level 3 (Nasdaq: LVLT) last year, raised more money in its June 2000 IPO than Google did.

So we've determined that IPOs with big first-day pops are utterly poor determinants of future success for the businesses, and now we see that companies that raise a great deal of money in their IPOs also might not succeed. After all, every penny that a company raises in an IPO comes from somewhere.

But as much as Wall Street wanted Google's IPO to be a disaster, as much as they wanted to get back to the days where they could hand their best clients $0.25 dollars to be flipped when purposefully underpriced IPOs hit the launchpad, the end result was that Google raised a great deal of money, $1.2 billion of which went to the company, and some $450 million now lines the accounts of nine insiders, including a $136 million payoff to Yahoo (Nasdaq: YHOO).

Wall Street didn't get its wish: The Dutch auction process, though it could have gone smoother, was successful. Oh, Wall Street was bitter about the lower fee structure that they receive under a Dutch auction IPO, but even more than that is that this type of structure keeps the underwriters from being able to give shares to their friends, families, and best clients. Even though Morgan Stanley (NYSE: MWD) exercised its 2.9 million share "greenshoe" option -- something that was written in last week when Google cut the price and share amount -- Google's IPO remained democratic in the same flawed way that every democracy seems to work.

If you recall, there was a big scandal about Wall Streeters placing shares with their best clients, all while forcing the same to pay extremely high commissions on separate trades, a strategy known as "spinning." It's also a strategy known as "illegal," but that shouldn't be construed to mean that investment banks haven't figured out another way to profit handsomely on dollars they have to sell to someone at $0.50.

Investors tend to think of an IPO price as a market price, and it isn't. In the standard IPO, over the last few years the expectation has been that there would be plenty of profit left for those who purchase the shares. This, of course, enticed those who received the shares to flip them quickly once real trading began and let those buying from them take on all the risk.

I submit that where the Google IPO process faltered wasn't due to the structure at all, but to idiocies minor and major. The biggest problem, as I saw it, wasn't the structure; it was the fact that the stock was priced at a high price-to-delusion ratio and that the company set up an inexcusable dual-class structure. But I'd suggest that those who bought into Google for the most part were not under the delusion that this IPO would offer the same instant surge as that of offerings past -- anyone who wanted shares would get a chance to bid.

Furthermore, it appears that the company engineered the offering so that the price would not plunge: George Mannes of (Nasdaq: TSCM) reported that all of the big Google IPO investors he interviewed noted that they received about three-fourths of the shares they requested -- a bid-filling strategy that would leave people who wanted to complete full allocations to buy the remaining shares on the open market. Voila! No opening-day drop, as this creates demand to buy, not sell, among people granted IPO shares.

The Google IPO was a success in that it raised a substantial amount of money for the company. It was a success in that the company managed to grant itself an absurd valuation and the investing public bought into it. The IPO was a success in that not just a Dutch auction, but also one of unprecedented size and complication, came off relatively cleanly.

But it wasn't a success in that the company has known for years that when it came public it would be under an incredible magnifying glass, and it still managed to blow it in a bunch of different ways. Google's registration statement quoted Warren Buffett, then the company proceeded to ignore most of Buffett's enduring lessons of treating shareholders like partners. Buffett has been perfectly willing to jawbone his own company's shareholders when he thought they'd bid his stock up too high. Google, on the other hand, priced their own shares too high and demanded people pay that amount.

That's off the mark. They got away with it -- but being the second coming of one of the greatest managers in corporate history demands more than rattling off a few quotes.




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