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Why Wall Street Wants Google to Fail
Sam writes "The most anticipated initial public offering in years threatens to derail a cherished gravy train, where underpriced shares are handed out to favored investors and grateful CEOs."
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As much as the media hype surrounding this offering has tried to present the image that the little guy can take part it simply is not true.
Most of the brokerages that will be offering this to the "public" still require substanital assets in the account, most with a 100,000 dollar min.
Instead, the underwriters, led by Morgan Stanley and Credit Suisse First Boston, will get 3%
All very nice, reputable people who really don't deserve to be treated like shit. I mean, they'd never to that to anybody themselves would they?
"A door is what a dog is perpetually on the wrong side of" - Ogden Nash
Second, why are they demanding share prices in the $100 range when Ebay/Yahoo (company's with more value) are priced significantly less than that?
As a day trader, I'm sure you know that the price of the individual share has no individual impact on the total value of the company at all.
This sig has been deprecated.
In a traditional bookbuilding IPO, the discretion employed by the underwriters ought to eliminate problems associated with information asymmetry, and ought to decrease average levels of underpricing. This should consequently result in the underwriter maximizing the issuer's initial capital gains. Nonetheless, this lies on the assumption that there are minimal conflicts of interest, and that these interests are controlled. Loughran and Ritter (2004), however, found that underwriters quite often will allocate shares on the basis of previous business with certain institutional investors. The "dot con" was a perfect example of this.
At times, these investors would also have to give commissions back to the underwriter in return for share allocations in some favorable IPOs. It can therefore be argued that the underwriter also has incentives to not act in the best interest of the issuer, and we can clearly see this when the average underpricing of a stock is significant.
One of the risks of using the auction is that those who bid very high can potentially corrupt the process, and cause inaccurate pricing. What may occur is that an institutional investor could bid at a (significantly) elevated level to ensure a share allocation. Their bid may not be representative of what they consider the value of the company to be. Nonetheless, if bidders are considered rational economic agents, high bidding will not only occur with a few investors, since people would expect a large degree of high bidding. This would therefore be incorporated in their valuation of the issuing company. Hence, the argument that if everyone overbids that the IPO will be overpriced may not necessarily be true in all circumstances. And Wall Street hates this theoretical implication, and the fact that they lose their leverage.
The original article explains exactly why market analysts are trash-talking Google and the upcoming IPO: They don't want the Dutch auction system to cut them out of the picture.
Your claim that Linus made millions using precisely this system is incorrect. Yes, Linus was allowed to buy stock at bargain basement prices, and he earned a ton when the various Linux companies IPO'ed. The difference is, Linus was closer to an employee than to a traditional investor.
Here's the way I understand the situation, and please correct me if I'm wrong: When a company says, "We're expecting to go public at $5 a share, but we'll let Guybrush Threepwood buy a thousand of them at $1 a share," then the company is agreeing to give up $4000 of the money they could have received from the IPO. But when a stock brokerage says, "We're expecting this IPO to be worth $5/share, but we'll tell them to offer the shares for $4 so our investors will love us," they're taking 20% of the money that should have been obtained from IPO and putting it directly into investors' pockets. That's underhanded, and maybe even technically illegal. But it's what brokers do to keep their investors coming back for more.
You want the truthiness? You can't handle the truthiness!
So whether Google actually gets enough money out of the sale of the company is irrelevant?
Stock is sold to raise money, the point of the stock market is to ensure that there is a place to sell stock. What happens after the sale is important, yes, but if that was all there was it'd just be a high-priced "fantasy capitalist league" betting pool.
Of course there *are* those cynical enough to look at it that way.
The "stock market" is heavily involved in deliberate government corruption.
The Bush administration has been appointing heads of government agencies who reduce the role of those agencies. After they destroy the effectiveness of the agencies, they go back to running their businesses, and the corruption gives them more profit.
Another way they corrupt government is to starve the agencies of operating funds.
For a discussion of starving the SEC (U.S. Securities and Exchange Commission, regulates the stock exchange), see this article: Keeping the SEC on a Starvation Diet. The corrupters don't want their stock manipulations discovered. They want more of this: Enron fraud, this: WorldCom fraud and this: Tyco fraud.
This is all part of extremely widespread corruption in the U.S. government. Even the 3 movies and 34 books linked in this article are not enough to tell the story: Unprecedented Corruption: A guide to conflict of interest in the U.S. government.
They are corrupting the IRS (U.S. Internal Revenue Service, collects taxes), too. The corrupters definitely do NOT want their tax returns to be audited, so they arrange that there is not enough money for audits: Bush Request for IRS Not Enough, Report Says
They are corrupting the patent office the same way. That's why there are so many crazy patents.
Good. You day traders are a blight on the investment business.
Google has at least three good reasons to do its IPO now.
1: Microsoft is preparing to enter the search engine business in earnest. They have very deep pockets, and no compunctions about stealing technologies, so Google is going to take a severe profitability hit even if they win the war as expected. Such battles cost money: Google needs enough money to not run out of software and hardware development and maintenance funds.
2: Some Google patents, important ones, are running out in roughly 2010. It's good for the CEOs and VPs to cash in their stock optiions while it's at this peak, rather than wait for it to start dropping as other companies their attempts to create "Google-killer" technologies. Even if they fail, they will drive the value of Google's services.
3: They've about saturated the search engine market. This is why they've recently committed to entering the email market, which I wish them success in, but it prevents them from growing much more in terms of profit in the search engine market.
However, the key function of an underwriter / investment bank is to CREATE A MARKET. This includes some activities such as buying stock if the stock proves too weak too soon. They often have contracts that compensate them if the stock maintains a certain price for a certain amount of time. This is why IPO managers want to allocate stock to known people who will not sell and take a quick profit. There is no such protection with Google - anybody who buys the stock through the IPO can sell at any time (I believe - I have not read through Google's IPO site). I am, of course, not privy to the details of Google's IPO contract with their underwriters, however, it seems that the IPO manager would not want to guarantee stock prices when the manager has absolutely no control over who buys the stock and when they will sell.
I predict that the Google IPO will fail miserably - I don't predict this because I want to see it - I just think that given market dynamics, this is what will happen. Until a market is established for a stock, an IPO wants to be carefully managed, and Google is side-stepping that management process.
For one, I will be watching the price, and if and when it breaks, I will sell short. And I bet that I'll make at least a few dollars on the trade.
Anyone who is contemplating buying google owes it to themselves to read Reminiscences of a Stock Operator by Edwin Lefèvre. It is as relevant and educational today as when it was written 70 years ago!
I certainly may be proved wrong, and will be willing to learn something new. We'll all see soon, won't we!
From my experience (mind you, I've been making money in the 2000 marketers while most other people have lost) analysts, experts, advisors are generally full of $hit. The great majority of these people have a reason to look out for their own interests, and there is actually motivation to lead others down the wrong path. A lot of what you hear on CNBC etc is just pure garbage.
So whether an analyst tells me that Google's IPO is overpriced, or the warnings are overblown (as this article claims), I pretty much take any of that advice with a whopping scoop of salt and do what I feel is best, given my knowledge in the area.
I dare say that the "little investor" would get the raw end of the deal in this IPO. Anyone who buys shares at $130 on opening day will quite likely be mighty upset when in a few months those shares are worth half that or less. I'm not sure that Google can sustain that high of a price for very long.
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Sure it is. It is just an observational science rather than an experimental science, which means that it takes much longer to test ideas as you can't do controlled experiments. Some economic theories have become well founded over time (although they are certainly incomplete). The evidence for other ideas have far to few data points and far to many external factors to come to any real conclusion. Of course short of hard data, one wants to have at least a best guess answer, and noone seems to be able to say "I don't know", so more subjective judgement is often put on top of the science. Which is fine except for the few egotistic idiots that will try to treat their best guess as scientific fact, but what can you do?
See http://forums.seochat.com/archive/t-12969.
Stanford has granted an exclusive Pagerank license until 2011. After that Stanford can license it to anyone they want until it expires in 2017.
What kind of bullshit law is this? Nothing. What you are talking about is what the stockholders and board of directors require the company officers to "exercise due dilligence" in keeping the company charter (ie, profitable as possible).
However, in Google's case, the board of directors is the main three who own voting stock, and the stock you get off the market is "non-voting stock". Read up on their released financial docs.
The guys at google aren't dumb. And they still have a potential to "not be evil". I have hope.
Note: not a chance in hell, i'll pay that much for google stock
though. Not a chance.
And that's the thing - only experts can possibly value a stock. What if a stock were $15.00 a share? Then would you buy? Or $15,000.00 a share? $0.15?
It's simply impossible to tell the value of a share just by looking at its proposed pricetag. You also have to know how many shares there are, and what the shares represent.
Heck, Berkshire Hathaway goes for $85,000 a share. Is that over-priced or under-priced?
Happily, the dutch auction process removed the influence of a few, biased experts, and puts the valuation process into a collective group of experts that vote with their pocketbook. It has been shown that such collective decision making can be very very accurate. A dutch auction is what the market is all about - why it hasn't always applied to IPOs is beyond me.
From what I understand from the article (keeping in mind that I pay people to look after my money), there will be more shares available for Joe Investor, and the opening price for the shares will be decided by input from Joe Investor... rather than investment bankers asking investment bankers what investment bankers are willing to pay for these shares, Google will be asking the general public what their shares are worth.
This is still Google attempting to make money from an IPO, but that's nothing new, why should The Oracle not make a little green to keep offering it's top notch services?? However, it seems to be Google is doing everything they can to get feedback from actual users (or at least actual investors), and is keeping toadying by the big investment banks to a minimum...
The end goal here is not cheaper shares... the major goal is a fair share price decided by the investors rather than an undervalued share price decided by bankers looking to curry favour with other big companies and line their own pockets (for doing nothing really...)
Although I'm sure I've missed the point entirely... I hate $$$... hehehe
The chains are broken
Loki is free
Ragnarok is at hand...
How does the price of the shares matter? Google could do a 4-way split and drop the price to, say, $33.
How does the price of the shares matter? Google could do a 4-way split and drop the price to, say, $33.
Split's do not change the value of stock. They SPLIT the value among more shares. Everyone who had 1 share gets 4, even the people who own non-IPO shares. A four way split is like getting four quarters for a dollar, no change in value.
If as the grandparent sugested it's overvalues by nearly 100% then it's as if I tried to sell you a dollar for $1.75. How would selling you four quarters at that price instead help? You'd just be getting a bad deal in four pieces!
I personally don't know if it's a bad deal, but you don't even seem to know what a share split means.
Bonds give you no authority (in Google's case, that's relatively true anyway). Bonds are also a lot less likely to make any big money for the investors. They'd be a lot better off to privately finance the thing thru a bank. A bond is nothing more then a loan with terms set in a bond where the debt is something you can sell.
There's in theory, low risk, and low reward. It's a different type of investor. An IPO for the company has absolutely no risk. They give up shares (paper) of the company, and they have no liability. Google probably doesn't have the assessts to back up a bond (their value is in their algorithms and the people who run their systems and some data that will be out of date 6 months from the date of purchase, not in physical assests that can be sold during a bankrupty fire sale).
The reason to IPO is to generate income. That's why the company does it. There are other reasons why. It now allows the owners of the company to selectively cash out to a liquid market. So the original investors can get in and out pretty easily. If they didn't want to generate money, I'm going to imagine, they could just get listed as opposed to actually issuing new stock to be sold. Then the original investors could get in and out as they pleased. They could have a much smaller IPO. You do it go generate revenue.
In theory, you do actually have voting rights with Google, it's just that they don't do you any good. At some point, that could actually change, and you still actually get to vote. I'm guessing if every non-founder stock holder votes one way, the founders might consider it.
Microsoft had no dividend for 25 years. I'd be just incredibly happy had I bought them on their IPO. As a long term investment, Google might have similar possiblities. Google I would imagine is going to start accumulating incredibly valuable assests either by creating them, or buying them up.
I don't think that Google will go up in price. They used the same system that the US Gov't uses for selling bonds in order to virtually guarantee a solid price. However, speculative stock buyers along with pre-IPO shareholders who slowly dole out shares while the price runs up. They'd prefer to see Google sell at a $10 price point. There is a lot more run up room. Once the stock moves from 10 to 100, how many people will want in on it? It'll be a feeding frenzy, back like it's 1999.
The person I was responding to, wanted to know why they should care which way it goes (Dutch Auction, or standard IPO). That's why they should care. One way the stock they purchased actually contributed to the value of the company, the other, it contributes to the pockets of a bunch of bankers. If you can get in on it the first day via normal IPO, you'd much prefer that Google use a standard IPO setup (there's plenty of money to be made if you can get in on the low end). If you are a long term investor I know I'd rather have my company get the $3 billion, rather then the investment firm and their friends. I don't own any shares in the investment firm or their friends.
I think Google is silly company to invest in, given that I don't get much in the way of voting rights, and they aren't planning on having a dividend. There's also so serious upside. They could be the next Microsoft. I know I'd be just thrilled if I'd bought every last share of Microsoft I could afford in 1990 and held on for dear life during the ride. It'd be worth about 1000 times what I paid.
Google practically mints cash. They have incredible technology that no one can duplicate. They are insanely popular, and have cornered their market. The problem is that switching search engines is trivial. If someone else can out-google Google, it'll be like when the car was invented. They'll be the best damn buggy whip maker their ever was....
Kirby
Because $120 seems pretty clearly to be a silly price, at least compared to other stocks. I don't really think many people are going to want to buy at that price.
That doesn't make sense. Why do you even care what the share price is? It means effectively nothing. Remember when ESR made an ass of himself with a very open letter about share prices to Sun's CEO?
Market capitalization is the number you want to be looking for.
What is likely to happen, by my guess, is that Google is going to have a relatively stable stock. Works for me.
May we never see th
It seems alot of people are confused about pricing. You really want to be looking at market capitalization, not the actual share price. Market Capitalization can be calculated 'roughly' by multiplying share price by the number of ALL shares. You may also want to note that they are selling less than 50% of their total capitalization. They are doing this so that Wall Street cannot definitely control the company. Noone here believes in the Efficient Market Theory huh?
[H]ow does it make money? Mostly by paid search results.
Actually, my understanding is that they make more money off of licensing their technology than off of paid search results. A lot of companies like to be able to search their internal documents without posting them publicly.
the total number of shares ultimately for sale is fixed. that is, you know how many shares of the company will come to market in the future because you know how many shares and options were issued. (well, additional options in the future will certianly dilute, but that's a different issue.)
.... plop ...
so really, the total number of shares that come to market is known. they're not increasing or decreasing the value of the shares by selling more or fewer. however, they might be able to manage the price by offering more or fewer. and this they can do initially by controlling the size of the initial float, and by lockup restrictions on the remaining shares.
however, once the lockups are over, its an open market: you know exactly how many shares will be eligible for trading. those who manage the ipo will hope to have a liquid market in those shares available by that time. or else
Everyone keeps comparing this to a regular IPO. As far as I understand, its not. This whole dutch auction things changes everything. The idea is that the stock starts at a ridiculously high price and they keep lowering it until people buy. Then when people stop buying, they lower it some more. They keep doing this until all shares are sold. And whatever the last person pays is what everyone pays including the very first bidder. So if you start paying $135 for a share, its really just a short term initial risk your taking because at the end of the day you may only be paying $5 bucks for it. Its kinda like saying, "I have faith in this company so I'll pay this much for a share right now" knowing full well that you'll pay less, its just you dont know how much less and thats where the risk is.Personally, I think the system is ingenious and I hope it catches on. This is all of course assuming that I understand correctly how it works.
Regards,
Steve