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How Google has ruined its IPO deal

http://biz.yahoo.com/ts/040727/10174243_3.html

Discuss.

(I don't know enough about these things to comment.)

Neanderthal man
Wednesday, July 28, 2004

is Yahoo a fair and balanced source for commenting upon Google?  Is this a general feeling about how the Google IPO is going?

i like i
Wednesday, July 28, 2004

Well, let's see.  There are several factors necessary to determine if this is true:
1.  Look at the amount of capital Google generated at their IPO.
2.  Compare that with the amount their stock is currently worth.
3.  Compare that to their P/E ratio and some other things, like what they are using the money for.

We can't do that because ...OOPS!  They haven't gone public yet!  This guy would have listed the 6 reasons why the Santa Maria was going to sink, before it even launched.

sir_flexalot
Wednesday, July 28, 2004

I don't see what the big deal is with the price point.

If you have $10,000 to invest in a company, does it matter that its divided into 10 $1000 shares or 1000 $10?

It might, but I don't know.

Yo
Wednesday, July 28, 2004

Seems like a bunch of psuedo-journalistic bitching to me. 

The $100/share thing really kills me.  If you're going to invest $500 or $1000 dollars, who cares if you get 5 or 50 shares?  If you are going to invest less than that, spend your money on a new pair of sneakers... you'll get better mileage.

"...dog days of summer..."  If you can't be bothered to log on in August to buy some shares, then you're not that serious about investing.  In fact, I think it was a good idea to do the IPO now because it keeps the hype machine under control.

Basically, I think that the limitations they're building into their IPO are designed to benefit serious investors and not granny buying 2 shares for her grandson.  That's fine with me.  Any serious investor should still be able to participate in this process.

Brian
Wednesday, July 28, 2004

I forget if it was Ben or Jerry, but while they were going public one of them said something about the stock market being nothing more than legalized gambling.

I would provide anecdotal evidence in the form of their stock performance, but they were acquired by Unilever in 2000.

www.MarkTAW.com
Wednesday, July 28, 2004

Wow you guys post fast.

www.MarkTAW.com
Wednesday, July 28, 2004

http://www.nbr.co.nz/home/column_article.asp?id=9705&cid=3&cname=Technology

(top article in Google news for "google")

"The Google IPO will only be available through US-based brokers, but anyone with a properly constructed e-trade account should be able to climb onto the IPO for a thousand New Zealand dollars or less."

www.MarkTAW.com
Wednesday, July 28, 2004

"That's because the company is requiring participating brokers to allow shares to be sold in lots as small as five with a selling price set in the $US108 to $US135 range. Normal IPOs go in blocks of at least 100 in order to help brokers cover paperwork costs."

www.MarkTAW.com
Wednesday, July 28, 2004

To me it sounds like Google is doing a lot to make sure anyone who wants to can get their hands on Google stock, not just the major players.

Maybe it's an altruistic thing, or maybe it's just becaues they think the stock price will shoot up because of it. Who knows.

www.MarkTAW.com
Wednesday, July 28, 2004

Actually, it does matter if each unit of stock is $1, $10 or $100.

Why else would firms spend millions of dollars each in performing stock-splits (Micorsoft for example has done many over the years).

Nemesis
Wednesday, July 28, 2004

actually, it depends on who you ask... Warren Buffet doesn't seem to mind that  Berkshire Hathaway is currently trading for 87,000 dollars a share

java programmer
Wednesday, July 28, 2004

Though there is Berkshire Hathaway B stock, which trades for considerably less.

www.MarkTAW.com
Wednesday, July 28, 2004

Article in Slate:
  http://slate.msn.com/id/2104415/

Checkout the sidebar commentary to James Cramer in the article (http://slate.msn.com/id/2104415/sidebar/2104419/)

Mike

MikeG
Wednesday, July 28, 2004

For normal, regularly traded shares (not Warren's realm of the ultra rich which is an extremely uncommon example that nonetheless pops up in every discussion of share prices) the desired share price is between $5 and $75 - it's partly a psychological thing, and partly to have a fine enough granularity to allow people to optimize their holdings (it does matter if the share is $50 or $500 if you want to buy $930 worth, for example), while avoiding so much granularity that there is excessive paperwork/tracking.

The cynic in me believes that Google set the starting price per share so high to build in a significant buffer to facilitate a large decline without necessitating a reverse split (which organizations have to do to keep the share within the psychological band, not to mention to avoid being delisted. Reverse splits are huge warning signs, and usually preclude the decline to obscurity). Furthermore Google is trying to ensure that they, and their insiders, are the ones that yield the greatest windfall from the opening day (versus most IPOs where the appreciation happens while the share is in the hands of the early holders).

Dennis Forbes
Wednesday, July 28, 2004

Allowing small lots of shares to be sold tends to increase the number of small investors over public institutions.  Its largely public institutions that hold the massive majority of stocks and historically they've been very bad investors in technology companies.

Increasing the proportion of small investors reduces the pressure (usually), on the company to dance to the tune of the shareholders.  I have a feeling that the management of Google think they know considerably more about what they want the company to do and the way to go about doing it than your average unit funds or pension funds manager.

Simon Lucy
Wednesday, July 28, 2004

Whatever you think of Cramer's delivery (check him out on his show to see him huff, puff, and all but blow the house down), he does have an uncanny sense about being right  when it comes to stocks.

His points on pricing and timing are spot-on, and it wouldn't surprise me if this contrarian view of his (remember most people on the street are excited about Google's IPO b/c it's the first big deal in a while) turns out to be true.

anonymous financial IT guy
Wednesday, July 28, 2004


I read something in the WSJ that said that with their $135/share price, Google would have a market valulation of 36 billion. (Maybe I missed the number, but they said it was on par with the likes of McDonalds and Sony.)

Ok...now everyone put down the web crack.

Is Google really worth that much?! Billions? Sounds like someone is trying to revive "The New Economy" crap.

I just don't see Google sustaining that kind of valuation over the long term. Sure, short term speculators might make a buck on early fluctuations, but I just don't see how the market will continue to value Google that highly. It just isn't worth that much money unless you subscribe to the 1999 version of valuation.

Huh?
Wednesday, July 28, 2004

On the internet, someone is always right.

a
Wednesday, July 28, 2004

Theres a small nanotech company that is going to go public soon, invest your money in that.  Although under the radar it seems more promising that some company based on college kid's search algorithm.

Yo
Wednesday, July 28, 2004

>>Sure, short term speculators might make a buck on early fluctuations, but I just don't see how the market will continue to value Google that highly.

But then, who besides speculators would invest in that kind of risky investment?

BTW, if speculation has such a negative impact on the general economy, I wonder why governments just don't make it mandatory to keep a stock for, says, 5 years, or you get to pay high taxes if you sell before this (unless you can just justifiy of a major reason like death of spouse, long terme unemployment, etc.) What's wrong with this picture?

Fred
Wednesday, July 28, 2004

Speculators (or "maket makers", to use the more respectable term) are important, b/c without them, there would be no liquidity in the market place.

For example, you want to buy but no one wants to sell (assume all the current stock holders are following your proposed '5 year ownership' rule).  The market has no liquidity, and you can't buy.

So the markets tolderate and in some cases encourage speculators b/c they're willing to jump in and take the other side of your trade, which makes the marketplace viable.

anonymous financial IT guy
Wednesday, July 28, 2004

OK, but until market deregulations in the 80's, people (actually, I guess it was more banks rather than individuals) bought stocks and kept them for years since the goal was long term, and had no problme with that.

I understand that stocks are more liquid today, but I don't understand why we complain about stock crashes and instability and companies only caring about the short-term... while not doing anything about it. Is there a major drawback to financial penalty if you don't keep your stock less than 5 years? After all, this is required for some of the savings plans (life insurance) I read about. Puzzled.

Fred
Wednesday, July 28, 2004

Most people don't like speculators b/c in the case of an IPO, for example, they have access to the stock at a low price, then sell at a higher price, usually to some unsophisticated investor caught up in opening day hysteria who's never going to see the stock go higher than the price he paid.

That behavior was excessive in the dotcom years, and that's why Google is doing a dutch auction to reduce (not eliminate, since there will always be unsophisticated dupes who will fall into that trap) the chance of that happening.

The circumstances you describe in the 80s are only part of the picture: throughout that whole time, market-making firms (some with respectable names like Merrill Lynch & Goldman, Sachs) were active in the markets, and profited by providing liquidity, i.e. willing to buy when you sold, and getting in and out of a stock several times a day.

Some funds, such as the insurance one you mentioned, have decided to "buy and hold" as a strategic philosophy.  Warren Buffett does this too.

Other funds, "momentum", or "program trading" funds, take the opposite approach.

Both types coexist in the markets every day.

anonymous financial IT guy
Wednesday, July 28, 2004

A lot of good posts here.  Adding some thoughts:
- $10/$100/$1000 does matter because it all relates to the overall valuation of the company and how fluid it is.  A 10% add is $1 on $10 but $100 on $1000.  Other than really bad news no one flows 10% on a $100 share.

- Dutch -  I see the issue he makes with dutch, however investors not being used to it is the worst logic I have heard in years.  [D'em PC thingys are hard to use, we should stop that.]

- Speculation - This is a smaller issue that it was in 1999.  The auction attempts to rid speculation factor by forcing everyone to buy at an expected rate. Whether it works, time will tell.  What it does help is stop the buy at $5 and sell at $135 six hours later.

- Speculation 2 - Holding for 5 years.  This will not work because too many corporate issues are unstable.  If you bought Rite-Aid stock at $50 would you have been expected to take the loss when they restated earning and it dropped to $4.  Would you be forced to hold MS stock if Bill Gates retired?  About the only way I can see this working is to open it to "X" days or "Y" percent change in value.  However, that guarantees that everyone takes a loss if the stock tanks, of at least "Y".

Anonanonanon
Wednesday, July 28, 2004

>>This will not work because too many corporate issues are unstable.

But weren't those unstable issues created by excessive deregulation? Originally, the goal of the stock exchange is to provide an alernative to companies to find funds (while small businesses still have to rely on going into debt, as bigger companies used to do), but currently, the vast majority of transactions have nothing to do with growing businesses, and everything to do with speculation.

Considering the very concrete consequences on the real economy after a crash, I just don't understand why governments don't get together and decide to slow things a bit, eg. by raising taxes on any profit made.

That wouldn't keep companies from being funded by the stock market, and would keep speculators away, or at least, cool them down a bit. What are the negative consequences (more than the current situation) that we can expect from this?

Fred
Wednesday, July 28, 2004

If you take advice from Cramer you get what you deserve.  Come on.  It is sour grapes. 

Cramer and other institution insiders got rich in the 90s by buying tech stocks pre-IPO and flipping them as they came on the market.  Google has decided to put and end to that, and certainly they've pissed off a few of these "investors."  Big deal.  The Dutch Auction is more fair, and it benefits the company.  They get the actual market price for their shares. 

So screw Cramer.    He adds no value to the system anyway. 

christopher (baus.net)
Wednesday, July 28, 2004

Speculation has been going on for hundreds of years at least(remember the farmer in the Gatekeepers speech in Macbeth who 'hanged himself in expectation of plenty'?).

The speculator fulfiills a very useful role, as has been pointed out. He actually ensures that you have liquidity. The guy who buys up an acre of land that he doesn't need in the hope of selling it for more later allows the landowner to get some money for his land instead of starving or whatever.

What drives things crazy is when speculation is based  not on the perceived value of the asset but simply because you are betting on the price going up - that is to say you buy the asset not because you feel somebody will need it in the future and pay you more than the bargain price you're paying, but because you think in a few weeks people will have paid even more.

Stephen Jones
Thursday, July 29, 2004

Fred,

Imagine the risk premium that investors would demand if there was a 5 year lockup required when they purchased a stock.

In other words, only ventures with the very highest rates of return relative to the risk-free asset (gov't. bonds) could get funding through selling stock.

Volatility is partly a byproduct of trading volume. Academics have studied this phenomenon while trying to prove (or disprove) the efficient markets theory. Decimalization is probably responsible for a lot more of the recent increases in volatility than the reduction in capital gains taxes.

Rob VH
Thursday, July 29, 2004

Splits are just a Wall St. gimmick.  Nothing more.  If you have a pizza, it doesn't matter if it's 4, 8, or 16 slices.  You have the same amount of pizza.  The only "new" buyers you open yourself up to are people who literally couldn't afford 1 share at the pre-split price.  BFD.

A firm can offer 10,000 shares of stock at $1.    or 1000 shares of stock at $10.    Same marketcap of $10,000.  I love when idiots say "XYZ is a $50 stock, and IBM is only $30.  (ie: Idiot think XYZ is a 'bigger' company than IBM). 

Bella
Friday, July 30, 2004

Bella,

I disagree with you about splits. They're more than just a gimmick, they're a royal pain in my ass. When I become King of the Universe, the first thing I'll do is ban splits, mergers, and spin-offs....

Rob VH
Friday, July 30, 2004

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