Financial analysts lose their objectivity over Google

August 30, 2004

Google's share price was $106.15 as of Friday, up 25 percent from its opening of $85. That sounds like a decent start for an initial public offering priced at $85.00.

If the trend persists, we may eventually forget the words of doom visited on Google after the search company dropped from its target range of $108 to $135. Not only was the IPO declared a dud, complaints abounded that Google had chilled the tech sector, tainted other pending IPOs and stalled the stock market as a whole.

The bad news saturating broadcast and print media shared one thing in common. The primary source of Google-bashing was the investment community.

The gloating was epitomized by coverage in The Wall Street Journal, where one hedge-fund executive crowed, "Wall Street wins again."

True, the Googloids did not get their initial target price. And there were all kinds of complicated economic explanations for why. But years of following investment capitalists have taught me that they have a proclivity for perpetrating theories only they can explain. It might be called justification of existence.

In my admittedly more simplistic view, what happened with the Google IPO was what happens when you or I sell a car. We figure out what we want for the car, then we set the price at 20 to 25 percent higher. When the buyer negotiates the price back down, both parties wind up happy. The buyer thinks he or she got a deal, and we got the price we wanted in the first place.

Then there was the "Google snub" issue. In adopting a Dutch-auction approach to its IPO, thereby giving Joe and Jill Schmoe as much a shot as Scrooge McDuck at owning stock, Google ruffled the investment community's feathers.

There's no evidence that Google's slogan � "Don't Be Evil" � originally was "Don't Be Evil, Greedy and Corrupt Like Wall Street." But venture capitalists seemingly took it that way. When the target price was lowered, they saw a chance to strike back.

Nothing is wrong with quoting investment experts in news stories. In most cases, they represent the most authoritative source.

But in the case of Google, many financial analysts have lost their objectivity. Polling venture capitalists on the Google IPO "failure" is a bit like polling the McCoys on who won the Appalachian war. The response is going to reflect familial allegiances.

Through all the post-target flap I searched largely in vain for a Google defender. It wouldn't have been hard to find one. Anyone who invested a dime would have happily chirped the IPO's virtues.

In truth, any Google IPO that avoided going south has to be considered a success. Not so long ago, remember, tech IPOs were rabbits out of the gate and turtles by the first turn.

I can recall the aftermath of Red Hat � the Linux company � going public in 1999. Within hours it had made initial investors fabulously wealthy.

As Red Herring later reported: "Underwriters, who bought the shares from Red Hat at $14 each, turned around and sold them for much more; the first trade came in at $46 per share." The stock closed the first day at $52; today it trades at around $13 ($26 when adjusted for a split).

Guess who made off like bandits in that one? It's still just as early to declare the Google IPO a success as it is to pronounce it a failure. But a recent search on Google IPO success listed 145,000 entries, while Google IPO failure returned a mere 35,400. (The search was on Google, but Yahoo! yielded similar results � 293,000 to 91,900.)

It would be a mistake if, based on the Google aftermath, the auction approach is abandoned forever. When it does come time to evaluate the IPO for the history books, let's hope as many Hatfields are consulted as McCoys.

Source: Seattle Times

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