Was the Google IPO a success?

August 26, 2004

A week has passed since Google has officially become public.

I've had time to digest the events surrounding the company's initial public stock offering and I still find myself pondering two key questions: Was it a success? And is it worth doing it again?

Google, of course, was the most eagerly anticipated IPO since the dot-com bubble burst, and it attracted a great deal of buzz. However, the hype surrounding Google obscured what I think are two substantive issues I discovered while trying to participate in this IPO.

First, while the Google IPO was billed as an opportunity for the masses, complete with a five-share bid minimum, the Wall Street brokers' eligibility requirements ensured that they remained the gatekeepers to the offering. The small investor, targeted by Google's marketing of this IPO, was often left out.

Some brokers had stringent requirements - Fidelity, for example, required a $100,000 minimum account balance to participate, according to its customers. Others, such as Ameritrade, E-Trade and Morgan Stanley (MWD), required bidders to fill out an eligibility questionnaire. In attempting to buy shares for this series, funded by The Associated Press, I was turned down after filling out my questionnaire and never given a reason why. Other investors I talked to reported the same problem at multiple brokers.

A few lines in the 211-page prospectus and on Google's IPO Web site were the only warnings would-be bidders had that brokers could deem them ineligible to participate. Many people put money into existing brokerage accounts or opened new accounts, hoping to bid in Google's unique online Dutch auction, only to find out brokers wouldn't let them.

The solution is obvious, of course. The underwriters and Google needed to get the eligibility information out there sooner, with more detail and with more emphasis. Most investors I talked to found out about the eligibility requirements after they got their bidder ID number from Google's Web site and opened or funded their accounts. It was too late for investors to find out they might not be able to bid.

The other major question is: How do you go about making an intelligent, informed bid on Google? The general public, in theory, had the same information as investment banks had - a comprehensive prospectus and a video presentation from the company's officers - in order to make a decision. But how many people have the knowledge and experience necessary to have an informed opinion on the value of a corporation with a $27 billion market cap?

I received a report Wednesday from Jeffries & Co., an investment bank, that rated Google a "buy" with a target price of $115 per share. I opened it to find out how the analyst, Youssef Squali, came up with that figure. Since Google did not provide any projections for its 2005 earnings, Squali computed those projections himself. He then calculated the price-to-earnings ratio - as well as the price-earnings ratio divided by the company's year-over-year growth rate - then compared the data to Yahoo! Inc. and eBay Inc.

It's a stretch to expect that same kind of due diligence from the average investor.

Most investors I talked to took Google's target price projections at face value and bid a few dollars higher or lower, depending on how they felt about Google in the most general of terms. That's not an informed decision, and most investors who got in on Google freely admitted as much. They were simply happy enough to have a shot.

Some experts feel the public just isn't informed enough to make these kind of decisions regarding an IPO, at least not without help and guidance from a broker. And of course, the underwriters really can't be giving advice on an IPO to the people they're trying to sell it to.

It would be helpful if, in the future, companies doing Google-type IPOs present their prospectus information in a more digestible format - perhaps a prospectus that does a better job of summarizing things as the reader progresses. Some interpretation, perhaps from independent auditors or analysts not involved in the IPO, would be useful as well. Naturally, that would require some additional wrangling with the Securities and Exchange Commission, but a better informed investing public is always a good thing.

Was the Google IPO a success? I believe Google had the most open, inclusive IPO to hit the market, and in that context, it was certainly a success. It involved the widest cross-section of the public than ever before, loosening Wall Street's exclusive grip on IPOs.

Is it worth doing again? I think there needs to be more effort to better inform the investing public about IPOs in general and the companies involved in particular. There's work to do for the next company that comes along, but the Google IPO was a good start and the concept of an open, inclusive IPO is worth another try.

Source: Rednova.com

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