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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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investor has a shot? How out of character!
*BOOM* Damnit, there goes my sarcasm detector again.....
Wall Street is in the power circle and want to keep it closed. Radicals, such as the people who operate Google, are to be kept out. Greedy individuals interested in human interests and making real products have no business on Wall Street (according to Wall Street).
I don't have any greater respect for companies like Enron who cooked their books to inflate stock prices, but one can begin to get an insight as to the motivation to do it in the first place. Even more is the shame that companies get punished for not providing short-term gains, which are worth little in the real world in terms of product/service output.
It would be cool if it didn't suck.
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.
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
One rare thing about Google is their "Don't Be Evil." mantra, which somewhat translates to the company turning down the chance to make quick bucks today in the expectation that they'll get that money back in the long run through their near-flawless reputation.
That's how Linus made millions.
Here's an article in Business Week on the google IPO.
Commentary: Google This: Investor Beware
The Web search outfit's business is terrific, but its long-term outlook is cloudy
When Google Inc. predicted a wallet-cleaning price range of $108 to $135 for its shares on July 26, few on Wall Street flinched. And why should they? Despite a valuation as high as $36 billion for its offering expected in August, the search kingpin's business continues to dazzle. Growth in sales and profits have rocketed over 100% so far this year. And analysts project Google will generate more than $350 million in 2004 net profits. Even with stepped-up competition, Google's share of the U.S. search market has grown five points in the past year, to 37%, giving it a comfortable 10-point lead over Yahoo! Inc. (YHOO ), according to researcher comScore.
Sure, IPOs are inherently risky, but Google stock may be especially unwise at this nosebleed price range. At the midpoint price, Google's would-be $33 billion valuation is a step down from its closest competitor, Yahoo, a seasoned Internet giant with a diverse revenue stream and a market value of $40 billion. Compare projected 2005 earnings against these valuations, however, and Google's multiple is just a speck below Yahoo's. That's troubling, since Google is largely a one-trick pony, with no easy means to diversify its business and hefty management challenges. "It's priced for ultimate perfection," says a skeptical Google investor who plans on selling after the IPO.
Long-term investors should be very wary of Google's single-barrel business model. Selling ads that appear next to search results, or paid search, contributes over 80% of Google's sales. According to Forrester Research Inc (FORR )., the U.S. search ad market grew 94% in 2003 to $1.9 billion, but growth is expected to slow from 45% in 2004 to 16% in 2007. As long as Google remains so heavily dependent on a single search market, it should trade at a discount to Yahoo, says American Technology Research Inc. analyst Mark S. Mahaney. Citing its quiet period, Google won't comment.
Google co-founders Sergey Brin and Larry Page aim to expand into new businesses, but that won't be so easy. The most obvious foray would be into so-called branded marketing, the multimedia ads that adorn most Web sites. Unlike the text-only ads that accompany Google's search results, these snazzier ads entice large advertisers that are as concerned with building brand as they are with driving traffic to their sites. It's big business, worth about $4.5 billion in the U.S. this year, according to Forrester, vs. $2.8 billion for search ads.
Google, however, is a long way from proving itself a player in branded marketing. Sure, the six-year-old company is tinkering with a trial program that delivers targeted image ads from its roster of 150,000 advertising customers to other online content providers. But Google has not hinted at near-term plans to open up its own prime real estate for branded ads. Such a risky move would run contrary to Google's long-established mission of providing a sleek, simple page that favors speed over sizzle.
Even if Google does pull the trigger, it would desperately trail such rivals as Yahoo, Microsoft's (MSFT ) MSN, and AOL (TWX ), which have spent years building their salesforces and relationships with traditional marketers. Although Google points to its 150,000-plus advertisers, buyers of search ads often aren't the same people who buy branded ads. "The people who control these budgets are very different," says Wenda H. Millard, chief sales officer at Yahoo.
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.
Another 'big guys wanna screw us' article.
Who cares, the current task is to raise as much money for google as possible. Success will be raising more this way then a similar typical IPO.
When they sell underpriced shares, the company doesn't make as much as it should. This hurts the company as it doesn't get as much money as it should, and the existing shareholders, as they don't get the maximum value for the new shares they issue.
Who cares what "Wall Street" wants, it is the owners who matter.
Reminds me of that part in the Simpsons where Lisa (newly crowned Lil' Miss Springfield) is addressing a college football stadium:
Lisa: "College football diverts funds badly needed by education and the arts!"
Nerd in bleacher: "Is that true?"
Other nerd: "Let's get 'em!"
(Nerds start charging after the football players in the field)
Nerds: "Reeeee! ereeeee! reeeeee! reeeee!"
It would be cool if it didn't suck.
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....
They could have gone out in an IPO six months ago, when the market was literally ready to pay anything to hold Google shares, but they let it get stale in the public mindset, the cover stopped, and the market slipped below its 200 DMA. Now Google goes out in what may be a new bear market. Congrats guys!
These market makers have just as much contempt for the individual investors. Wall Street is all about the control structure and every level of it getting its own piece independent of whether anyone else is making money. You will see these fights as attempts to use technology to get real free and fair markets steal more and more power from "Wall Street." They're like the RIAA protecting their financial distribution networks from outsiders who seek to streamline all the crap between the buyer and seller.
I for one as a day trader, will not be purchasing GOOG for a long time.
It figures. Day traders do no good to the companies they invest, other then to demand immediate profits at the expense of long term solubility. Good riddance.
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.
"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.
Cheers,
Erick
http://www.busyweather.com/
Even the linked msn article doesn't support this interpretation of IPOs. It merely says that the middle men price it lower so the investors won't feel like they've been screwed when the overpriced stock drops like a rock after the IPO and refuse to do business with them in the future. It does not follow that somehow the little guy is getting screwed. This is just sensible business practice on the part of the investment bankers.
It's fine to want to keep "big business" in check, but if you just throw out absolutely anything that appears to support your case, you just look ridiculous.
-- d'arcy poirot
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 people with most of the money in the world don't like this idea, because it threatens their power, and they are likely to do more than just spread rumors to derail any such thing.
There are a multitude of ways to depress a stock price. As Warren Buffett has said, in the short term, the stock market is a voting machine, and in the long term, it's a weighing machine. The Guys with the Money have a LOT of "voting" power.
Over the long haul, this won't work -- you can't artificially hold a stock worth X amount of money very far below X forever. But they don't NEED forever. If they sell short, bigtime, and can hold the price down for a year or so, then they win... everyone thinks Dutch Auctions are a losing proposition.
The guys doing this could very well take a serious bath (short sales and derivatives are dangerous), but they may figure this as a cost of doing business.... if this idea takes hold, it could cost them a lot more than the few hundred million dollars they might lose on this manipulation.
Because of this, I fully expect that the Google IPO shares will drop fairly dramatically once they go on public sale. Personally, I'll be looking to buy in the aftermarket.
Sure but Google doesn't have to go public in order to get rich by analyzing financial patterns. What you say has nothing to do with Google's IPO.
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.
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.
Stop trying to astroturf. You're not fooling anybody.
Your logic is neither interesting, nor particularly well-informed.
Google's "Do No Evil" mantra is almost certainly another reason why Wall Street wants them to fail. A sense of morality is practically anathema in today's Fortune 500 world. They don't want a company that is not easily tempted by money at the cost of (employees' livelihood|third-world workers' lives|anything else worth protecting that isn't money) to ascend to their misty eyrie.
Honey, I shrunk the Cygwin
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
ECONOMICS IS NOT A SCIENCE!
*ducks behind a bush, but peers over to watch what happens*
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, glad to hear it! Anything that cuts out their obscene profits is OK by me, even if it's only 1/2 cut out. They don't deserve it, don't work much for it, and the system is thoroughly corrupt anyway. Insider trading is the norm, it's not the exception, they just keep getting better at developing ways to obfuscate how they pull it off.
Wall street NEEDS massive reform. People should be able to buy shares direct, with NO COMMISSIONS. We don't NEED middlemen skimmers and manipulators and shills for "stock". And the next step is a mandated lawful minimum transfer time period of at least one year, to stop gambling and day trading speculation, help eliminate boom and bust cycles and "irrational euberance". Make the stock "market" turn back into investing like it's supposed to be and not poker chip trading based on ridiculous voodoo wave theories and astrology and "nightly business reports" corporate brokerage shilling.
And then, HONEST MONEY based on actual quantifiable tangible assets, not poof created "credit". SCREW the central banks, buncha outright scumbag thieves. No one "owes" them any "debt". They have nothing to actually loan except digits they create out of thin air on computers.. It's a congame, always been a congame, always will be a congame. They aren't respectable businessmen, they are pirates, hijackers of peoples wealth and productivity, crooks. As far as I am concerned they should be charged with capital T treason.
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?).
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!
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
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 $hit. The great majority of these people have a reason to look out for their own interests, and there is actually motivation to lead others down the wrong path. A lot of what you hear on CNBC etc is just pure garbage.
So whether an analyst tells me that Google's IPO is overpriced, or the warnings are overblown (as this article claims), I pretty much take any of that advice with a whopping scoop of salt and do what I feel is best, given my knowledge in the area.
Google's management structure could also be a concern. The company prides itself on an organization that is nearly devoid of middle management and values freedom for engineers and their work. But Google's headcount is growing faster today than at any other time in its young life -- adding 3.6 employees each day so far this year.
This form of management could proove to be a problems since it is a significant cange from the traditional whips and shackles form of management. We would not want anything innovative coming out of a place like google now would we!
I especially like.
Google's management structure could also be a concern. The company prides itself on an organization that is nearly devoid of middle management and values freedom for engineers and their work.
humm maybe they should treat them like flying monkey poo and wall street will be happy with 135$ .
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.
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?
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.
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.
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.
= +
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.
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.
When you buy shares of Google, you'd really like Google to get that capital. When you purchase shares of google, you are now an owner in google. It's now in your best interest to be sure that google win's the tug of war between who gets the money. Because it'll maximize google's value.
This isn't so true if you're a speculative buyer who things that Google's price is going to jump up, and if you can just get your hands on it, to turn it over days later while it's on the way up. Then your on the wall street side, and you'd like to see them win.
So yes, depending on the type of investor you are, you have a vested interest in seeing one of the two of them win.
Hopefully, the price won't be the result of playing the games with supply and demand, and the psychology game that happens on Wall Street. There shouldn't be a sky-rocketing value, that if you can get your hands on it, in the first 3 days, and sell hours later a huge profit can be turned.
Liquid markets with stable pricing is good for everyone in the long term. Wall Street's problem is that if your plan isn't going to make money for Wall Street in the short term, they aren't interested. Short sightedness will be the financial ruin of this country if we continue to do things to maximize value in the short run to the detriminte of the value in the long run.
Kirby
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
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
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.
This IPO will be a disaster.
[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
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.
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