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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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Okay, let's look at what Google has:
1. Lots of public information (stock charts, news and webpages primarily)
2. Lots of private information (what users are search/researching)
3. Lots of computer scientists and programmers good at working with lots of data
4. Tons of computer power
You combine these elements, and you have a group of people that might be able to make sense of some of the chaos in the financial markets. They could get RICH! Fear the Google.
I think taking google would cause a serious disturbance; hence everygeek in the world against them :| I wouldn't even wan to temp that!
-- [H]itman_forhire
Really, the IPO process is something that'll make a few people happy and a few people not so happy, and then will just plain be forgotten about. The differences between the dutch auction and the typical IPO process will matter in the days immediately after the stock comes out, but then will just fade into the background as the market determines the actual value of the stock through day-to-day trading activities.
.com's that ulitimately crashed and burned, but I don't think it'll have any effect on Google's stock in the long term. Most of us normal people invest in the stock market for the long term, and should in general wait for the post-IPO price to become stable before deciding on if we want in on a particular stock.
It's an "in your face" shot to the IPO industry that profited on the
Of course, if the reason is because then then Wall Street will ignore the stock and no institutions will recommend it, well, maybe that's a great reason not to do this. After all, it's not uncommon in other contexts to pay a 7% commission to someone who can get you a good price. I guess we'll have to wait and see whether not giving the Wall Street folk their usual vigorish is worth the risk.
Disclaimer: I work for a company, but I don't speak for them.
There was a recent slashdot article about predicting financial patterns. Google has the tools and personnel needed to pursue this if they wanted to....
Let's just put it this way... Neither the United States nor China nor any other nation will be the next group with someone on the Moon.
I hardly consider Google a "one trick pony" given that they are hardly just a search engine.
As for branded graphics ads, every computer I touch gets a copy of Firefox, adblock (with my own block recipe), pop-up blocking and flashblock. Text ads still come through, which is fine with me, since they aren't annoying, gawdy or out of place.
"Investment bankers fear the "Dutch auction" IPO, if successful, could severely diminish their power and influence, and that has a lot of people on Wall Street worried and more than a little angry. In just about every interview they give, Wall Street sources are actively campaigning to undercut the IPO, warning the public that the stock will be overpriced, and instead of appreciating in value after the offering, will actually retreat."
Yeah, if there's anyone on the planet that i feel sorry for it's the investment bankers and their pissy little attitude b/c they aren't "in the loop" and google isn't bringing them into the "good ol' boys circle". Damn shame i tell you.
Note: not a chance in hell, i'll pay that much for google stock though. Not a chance.
... that also the business guys realises that the Internet is often about removing the middle man.
To stay competitive a country cannot afford too many people earling lots with little to show for, and with the internet their function is largely defunct.
Don't be stupid. "Don't Be Evil" doesn't instantly mean "Don't Be Smart". They know what they're capable of, and earning lots of cash is a pretty obvious thing.
With google's ubiquity in almost everyone's daily internet life, the potential for misconduct is staggering. The fact that they haven't abused their position yet makes me proud of the fact that i can afford exactly 1 share of their stock right now.
No..I think Linus made money on an overpriced stock. Most investors got burnt. Buying an overvalued stock just because we love google here on /. will result in the founders of google getting rich and you ending up with worthless stock. I personally don't have anything against the auction system or Linus making money from the VA linux IPO. Question is: would I buy google? No..And the fact that evil vested interests from Wall street are saying the same thing about google's valuation won't change my decision.
Speaking as a trader specializing in shorting stock, I would never short google. It might be overpriced but so was Ebay, yet stock kept rising. You just dont short companies which are monopolies or dont have strong competiton. It might be overpriced when, it opens, but with time it will do fine. As long as people continue to search and click those ads.
And they will.
That's why I don't think you can trust anything Wall Street says about the Google IPO: The investment banking establishment has too much at stake and too many institutional conflicts of interest to make them credible on this offering.
I've been saying this since day one. The great thing about the Google IPO is that it puts the market back into balance - remember, shares are *supposed* to be valued based on direct investor demand, not insider deals and analyst payoffs. The Street will do what is in *it's* best interest, which means controlling the market (ahem, not a free market then eh?)
Not only is Google doing the auction to avoid insider deals (and keep that cash in the family), but it's spreading the offering among many, many different brokers, even progressive discount brokers [/shamelessplug]!
Definitely *not* evil
"Whoever would overthrow the liberty of a nation must begin by subduing the freeness of speech."--Benjamin Franklin
A couple of pithy sayings:
A businessman's goal is not to make profit, but maximize profits.
When the bosses talk about improving productivity, they are never talking about themselves.
Shutting down free speech with violence isn't fighting fascism. It IS fascism!
I can believe "do no evil" of Larry and Sergey, they are smart geeks who will make some well deserved wealthy without doing evil and still have some of their ideals in tact.
But, since it became clear Google was the last big pot of gold from the dot com boom I'm pretty confident Google has filled up with plenty of other people, mostly business people, who will do any evil, in a heart beat, to maximize the money they make out of the IPO. Maybe Larry and Sergey can fend them off or dilute them, but I imagine it depends on what percentage of shares they still hold and how much power they've given up in the march to Wall Street.
As soon as Google is on Wall Street and on the "make the quarterly numbers" tread mill I assure you they will probably also do just about any evil necessary, just look at Red Hat and VA.
@de_machina
I think you're right, but I don't think it'll work out like the big boys might want. The Dutch auction method changes the dynamics of an IPO. Traditionally IPO shares are bought to get in on the initial bounce. With that dynamic things would work exactly as you describe. But the initial bounce has already been priced into Google's shares by the auction method. The people looking for that initial rise aren't going to be buying Google shares at IPO. The ones buying will be the ones who figure Google shares will be valuable for things other than their price, eg. dividends, splits and other return over the long term. Those people won't sell just because of a 6-month downturn in the price, the price isn't the reason they're holding the stock. If Google's revenue or cash reserves go down then they might sell, because those affect why they bought the stock, but price bobbles won't have a major effect. If this is the case, then an attempt to force Google's price down will be a disaster for the ones trying it and won't, in the end, affect Google much at all.
But can "They" hang together enough to pull it off? It is a prisoner's dilemma. If all the bigwigs work together and keep the price down, the old boy's network survives and all of "Them" benefit. But if a significant fraction scoops up undervalued stock, the deserters win at the others' expense.
The classic solution to a prisoner's dilemma is to have some way for the group to enforce behavior on the individuals (this is why we have governments). How can "They" punish deserters or reward participants?
IPOs are priced low to avoid a situation where the IPO ends up being overpriced, which can result in lawsuits. Erring on the side of caution, if you will. Technically, underpricing isn't any better than overpricing, but buyers tend to complain less (when's the last time a monopoly was sued over undercharging its customers?).
Damn!
Than what have I been studying for the last 4 years?
Seriouslly: Economics *IS* a science. The only problem lies in the fact, that it is more of a social science (like sociology, philosophy) than a fact-based science (mathemathics, physics...). Saying economics is not a science is like saying pyhiatry is not a science.
Economics is a science that tries to determine how people will act based on the previous emphirical data. That's why you'll get 7 different answers if you ask 7 different economists for a forcast.
boky
Google's management structure could also be a concern. The company prides itself on an organization that is nearly devoid of middle management and values freedom for engineers and their work. But Google's headcount is growing faster today than at any other time in its young life -- adding 3.6 employees each day so far this year.
This form of management could proove to be a problems since it is a significant cange from the traditional whips and shackles form of management. We would not want anything innovative coming out of a place like google now would we!
I especially like.
Google's management structure could also be a concern. The company prides itself on an organization that is nearly devoid of middle management and values freedom for engineers and their work.
humm maybe they should treat them like flying monkey poo and wall street will be happy with 135$ .
Ambient [Servlet Based Webapp Engine]
This article shows how the press only has a one-month attention span. In 1999 people were writing nearly identical articles about Salon's auction IPO.
Once a company is public its no longer quite the personal fiefdom of the founders/insiders that were running it. Yes a traditional IPO leaves the company a little devalued but as a side effect it buys the management wiggle room. Investors , that their shares in the toilet from where they bought them are much more susceptible to a buyout offer or just changing the management than those that have a tidy profit.
The real villian here is not the "Underpricing of IPO's", its the process of awarding the shares to the priviledged few as a perk. These people will hold the shares for as little as a few days and take a quick profit. They contribute little to the long term and just serve to get in the way of the investors that have a belief in what the company is doing.
Giving IPO's as a perk to insiders also serves to shove the fact the system is biased against small investors right in their face. This undermines investor confidence in financial institutions and weakens the overall financial system.
The fact that members of the social "sciences" go around using the word "science" is a marketing ploy and nothing else. These folks are hoping that their audience will miss the point : that the cornerstone of modern science is its ability to accurately predict based on theories. If a scientist predicts event E and based on theory T and E happens once for one set of input, and for the same set of input to T, event F happens another time, the scientific community will acknowledge that the theory T is broken. This doesnt happen in the social "sciences". The strategy there is to say "well we are dealing with humans after all..." . Perfectly true, but it is equally true then that they dont have scientific theories and therefore shouldnt be calling themselves scientists.
This was exactly the point of Alan Sokal. The sham philosophers and other social "scientists" were misusing the scientific vernacular in totally unscientific ways to gain credibility in the eyes of the world. Just because economists use mathematics, doesnt make their discipline scientific.
There is no such thing as luck. Luck is nothing but an absence of bad luck.
Just go to MarketWatch, last week's Economist (subscr.), and a whole load other places and they will all tell you how short sighted this MSN article is. Yes, it will avoid the pop. But that does NOT necessarily make it better. The way it's being conducted now, it remains to be seen.
= +
"They"? Who is "they"?
You won't get the shares if there are enough people who think the shares are worth $130
Actually, Google and the underwriters have reserved the right to set the offering price below the auction clearing price, if they think the shares are overvalued at the clearing price. So if the offering price is below your bid price, some of your bid may allocate, even if the clearing price was above your bid.
Obviously it's not in their immediate interest to lower the price, but if they think a big slide will make their stock look unattractive they may do so.
1) $550 is peanuts if you're serious about investing. Maybe it's not worth it if you just want a stock certificate to hang on the wall, but whatever. If you think it's going to slide to a "more realistic" valuation, you're free to pick it up after the IPO, whenver it gets to a price you find more reasonable.
2) This is how they intend to keep their "Don't be evil" policy in spite of Wall St. demands. It may seem to devalue the stock in some sense (e.g. what am I buying really?) but frankly, I don't *want* Google to sell out.
3) Again, you don't have to buy it the second it comes out. You don't have to be first. If you expect the market to adjust it downwards, buy it then. OTOH, if enough people expect this, then there may well be more of an upside to it than was expected...
4) All stocks are a gamble. Right now, Google has quite a premium on it's Adwords, but they are, hands down, pretty much the BEST internet advertising there is to be had (save maybe slashvertisements...).
Now there are dangers to Google--the nonsense about trademarks & people using them as Adwords is one worry. Another is that Microsoft will use their monopoly power to force their crappy, slapdash search engine upon us all. Competition is a worry in any market. I don't know what they can do, but I know that Google can compete and I know that they can turn out a superior product.
Frankly, I want some of the stock to put my money where my mouth is--as a vote of confidence in Google--and I'd be the type to hold it long term, rather than cashing out whenever things look bad. None of us have any way of knowing how things will turn out. Microsoft or trademark law may well spell doom for Google. Conversely, they may manage to embed enough Google in windows through programs like the Google toolbar to resist even Microsoft's efforts to eradicate them. I mean, 'google' is already a verb, I don't put standing up to Microsoft past them at all.
Earnings is the primary factor behind the growth of a stock price. There are various ways to keep earnings growth going, among one of which is new and exciting products. However, they are in the vast minority when it comes to other methods, such as cutting costs (ie, outsourcing, etc), cutting R/D expenditures, etc. Just look at Al Dunlop [google.com]. He was put in place by a mutual fund. Nowadays, it is very common for very powerful funds (pensions like CALpers, Mutual Funds, Insurance Funds) -- which move more than 3/4's of the money on Wall St. -- essentially take over a company and demand that it produce profits at all costs. At any cost. Sunbeam is an example. Mr. Dunlop is now forbidden from running any publically traded company.
Furthermore, stock trading has no intristic value. It is like all things in this world: it has value because people believe it to. All currency is now just fiat money. Gold no longer backs it up; just faith. Even if we did use gold, Au it self only has limited intristic value and we end up in the same boat.
Granted, SP500 companies produce a lot of products but a company that can drive up its earnings through new products rarely does so for long. It becomes a victim of its own success; too much attention is attracted from larger aforementioned money firms and control is vested away from the originators.
Sure, IBM, Sun Microsystems and all of them provide services and products but rarely are they new wing-bang-great-wow types. IBM and Sun are both examples of an interesting dichotomey. Sun, lacking any new exciting products isn't really dying but rather just slowly going off into the sunset. Its story is coming to an end unless something changes. IBM is still around but just offers services. Their server business is a cash cow. They just exist. That is, neither Sun nor IBM are doomed to dissapear; they will simply just exist. Corporations have a strange mixture of immortality and necrosis. They can be immortal, but only like mountains: static, unchanging. Perhaps like bureaucracies exist, producing products and taking in money, putting money out to government and payment to workers who buy things...a monotonous circle.
And in this is the problem: the inability to change. Old money is a term used at times to describe it. There is no cabal of corporate powers (maybe [rotten.com]) that get together on a regular basis and plot plots but there is a culture, an understanding amongst those who are part of the circle of consumption/production that is as basic as human nature: wanting to belong to a tribe.
Google is not part of this circle of power, and neither are the minds behind it. People who are into open source, who want freedom over technology [imdb.com] because technology can be used by totalitarian powers (they want your thoughts and actions) to control you. Certainly not political powers (although it translates into it) but rather cultural power. Here in the US, the public space (where we walk, go to school, work, church) is where we can act and culture (our common interests) is derived from that space. However, we are also attempting to be a self-governing state and so we end up turning that public space into a political space as well. Open Source is just another radical idea because it widens the circle of power.
People in the circle want to keep it closed just because. Things like grass-roots democracy, public-political space, people talking to one another threatens the circle and helps widen it.
(I wrote the original parent of this thread, btw, if that really matters)
When I read the article, I noticed something odd:
I sat down and started thinking about the implications of being allowed to increase the number of shares in a dutch auction, and I came to an interesting conclusion: I think this this is a loophole is equates to fraud. Let me explain:- Start by assuming that the share price offers have a normal distribution (or at the very least a somewhat symmetrical "triangle shaped" distribution -- low on the high and low, peaked near the median)
- In order to maximize the IPO, we compute the number of offers above each dollar amount and multiply it by the dollar amount. Clearly we want the peak value. Now I'll state without proof (you can try it in excel if you don't believe it) that the maximum occurs on the "upward slope", below the median. And the maximum score typically comes in at around ~50% above the score of the median offer.
- One interesting fact is that as standard deviation of the population of bids increases, the peak score decreases. A consequence of this is that the IPO value is actually reduced by vastly differing opinions on its value. (e.g. if everyone thinks shares are worth $120-140, then the company will make make more than if the offers ranged from $70 to $180.)
- Another interesting fact is that the people who made thier bids did so based on their perceived values of a tangible asset: x% of the company up for IPO. When you increase the number of shares, you dilute the value of the asset, and you actually invalidate (or at least linearly scale) the bid. However, I've seen no mention of the bid being scaled by the increase in shares offered.
- From the mathematics of the problem, it turns out that it's in the company's best interest to initially offer a low number of shares and then raise the number of shares after the bids are received. If the company is allowed to raise the number of offers based upon the known bids, and if the bidders have no ability to reject the final price, then the bidders can get stuck with less ownership of the company than they originally bid upon (for the same price).
- For the sake of illustration, I'm going to give a really exaggerated example: assume the company initially offered 1000 shares and gets 5000 bids. The company then computes the maximum IPO comes if they sell 4000 shares. Suddenly everyone finds that their bids were 4x too high, and there's nothing they can do about it.
So I have a serious question: Is Google allowed to arbitrarily raise the offer number without reducing the sale price accordingly? If so, then I can almost guarantee they'll opt to maximize the intake (thereby defrauding the new shareholders). Can someone who knows about SEC rules comment on this?p.s. Another question: What happens if there aren't enough "normal" bids and it turns out that some billionaire offered $1/share for 25 million shares? Does everybody get their shares for $1 each?
So the article here seems to be saying that traditional IPOs invariably choose a structure that purposefully causes the IPO price to be undervalued; and Wall Street is pissy about Google's IPO because they chose a structure that does not purposefully cause undervaluation, and Wall Street benefits from undervaluation. However, what the article neglects is the possibility that Google's IPO structure has accidentally overcompensated and overvalued the IPO price.
So I've been trying to figure out: What happens to the Google stock price after the IPO?
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.
But, the thing is this. People know this ahead of time. No one is expecting the price to skyrocket immediately after stock launch. This means that, as this guy notes, if someone is buying Google stock at IPO they're probably buying it as a long term investment. At the very least, if you had just spent however much ridiculous amount of money that you have to spend to be one of the initial buyers in the IPO, and it immediately after IPO sinks $20, are you going to respond by going "oh shit, i'd better sell it now!"? No! That would be stupid! You sell at stock peaks, not valleys-- doing otherwise would limit your participation in the IPO to just throwing away the $20 per share you bought.
So the thing is this: demand for the Google stock at IPO time will likely be very low. But supply is also likely going to be very low-- because likely, and especially likely if the stock price sinks immediately after the IPO happens, the people who bought into that IPO won't be interested in selling what they have. So what does this all really mean for the stock price? Will the overvaluation be cancelled out by the fact that the IPO will attract the sort of people who won't want to sell what they just bought for a long time?
Meanwhile someone in the thread I just linked claimed that some people will be signing on to this IPO for the purpose of sabotaging it-- I.E., we'll see a fall in prices immediately after IPO launch because the big investment houses will be manipulating the stock down in order to discredit the dutch auction method. But if this is the case, once this manipulation-based fall is finished-- and it can't go on forever-- won't we immediately see a really large bounce in the other direction? If people are now widely expecting a drop in Google's price to occur immediately after the IPO launches, then doesn't this mean that anyone who wants the stock, but isn't in the IPO, will be operating on the strategy of: Hold off on buying at IPO launch, then wait for the inevitable post-IPO stock price correction to happen, then as soon as the price seems to have stabilized at its lower, corrected price, then buy. In other words, when the minima of Google's stock's first big dip occurs, it seems likely that a small flood of new interested buyers will come into play, possibly even triggering a rally.
Beyond this: the whole "options" thing. How does this work out? As far as I know the way this works is that a bunch of the people who work for Google, as well as Google's original VCs, have the right to buy the IPO stock at a price well below the actual IPO cost. Is this right? If so, then these people will likely be wanting to clear out as much of this stock as possible as soon as possible, right? Does this cancel out my "there won't be many sellers at IPO launch because of long-term investors" theory above, because the investors won't be providing supply for the stock at IPO launch, but the optionholders will be providing lots of supply? How significant of a proportion of shares will the optionholders hold within the greater block of google stock available?
One last thing: Does Google even care what happens to the
Irritable, left-wing and possibly humorous bumper stickers and t-shirts
They want to get rid of the day traders. That's it.
The normal mantra of the day trader is to buy and sell in lots of 1000. They usually go for the lower priced stocks that have high volatility. By pricing the shares > $100, it means that most day traders will not be able to day trade on Google's stock.
Good for them! The day traders are the ones that usually ramp a stock up and down, especially the IPOs during the dot-com boom.
As well, by pricing the stock so high, they are really forcing people to think twice about investing in Google. Again, good for them! They have said repeatedly in their prospectus that the price of the stock could go down after the IPO, and I believe it.
I'm going to by 25 shares at the IPO, and see where the price goes. I'll top up to 100 shares either way, but I don't want all my eggs in the IPO since I believe that the price will drop.
As well, I hope they do as what was rumored and never split the stock, a la Berkshire Hathaway. In 20 years, I'd love to see the stock price in the thousands.
I'm afraid the only people to blame in the potential failure of the Google IPO are the google execs themselves. Their choice of using a dutch auction format would almost have worked well, had they not set such a high price range. Then, with the added negative news of "forgetting" to register 38mm shares with the FCC has turned their situation from risky into "just plain bad news." Wallstreet merely responded. THe underwriters haven't gone anywhere, and they arnt trying to make it hard for google by any stretch. Dont forget, it's in their interest for the IPO to go as smoothly as possible. In fact, before things all went to hell in a handbasket, wallstreet was really looking forward to this, hoping that Google's IPO would revitalize the IPO scene. But they will not give bad advice to their clients regarding the acquisition of the stock. That would be manipulating research. And lets face it, given the present situation, buying google on the IPO would be bad advice. Wait a couple months at least, if not more. You just dont know what else might come out of the woodwork. IMHO, google just isnt ready for this, wallstreet knows it, the public knows it, and even the "true believers" will know it soon.
Well seeing as how something like 20% of stocks are owned by the top 1% of the population, and 90% are owned by the top 20% of the population, you can see how those at the top might want to keep that club pretty exclusive. And that doesn't happen by people like those at Google allowing the public first shot at the IPO. Still, average people, or people in the bottom 80%, aren't going to have a whole lot of money to dump into buying up lots of Google stock from the IPO.
This is left as an exercise for the reader.
It's far from obvious that "Wall Street" wants Google to "fail" --- they're underwriting the Google IPO. Who do you think Morgan Stanley and CSFB are?
What's more, it's not obvious to everybody that Google's approach is necessarily motivated by helping individual investors (like the average Slashdot reader). For example, take Henry Blodget's recent column on Salon:
Recall that Google is also not the first dot-com darling to choose a dutch auction, either. Other notables include the stunningly successful Salon (heh) and --- wait for it --- Andover.net, back in 1999.A Dutch Auction doesn't necessarily kill the initial pop in a stock offering (there's an argument that it'll increase the value of Google's shares in the early days), and it doesn't cut the underwriters out of the action. They just keep the money they'd be doling out to cronies.
Finally, "do-no-evil" pledge or not, there are objective criticisms of the way Google is handling this IPO, and they aren't coming from Wall Street.
Personally, I wouldn't know the first thing about the true motivations behind Google's actions, but my totally uninformed take is that Google is doing an auction IPO just to be iconoclastic.