Financial analysts are getting a funny feeling about the Google IPO. Are we going back to the champagne and Cosmo days, when the bubble seemed as shiny and solid as a new Mazda Miata?
“There’s almost a twinge of the heyday when everyone and his mother was filing for an IPO,” said Melissa Burgess, director of business development for Impaqt, a search engine marketing company. “With Google being the dominant search player in the industry, it’s going to be huge.” Hearkening to the experience of the last four years, Burgess added, “What it caps out at is another story.”
Burgess said Google will need to focus on the needs and opinions of investors. “There is going to be a lot of cautiousness coming out of Mountain View,” she said.
“I see some short-term euphoria coming… and if the banks generate enough enthusiasm, then I can see the retail crowd running the stock up,” said Melanie Hollands, principal of Koala Capital. While she thinks that this time around, individual investors won’t be as easily duped by Wall Street mania, “There are still a lot of hopeful and greedy investors out there. However on balance, I think the market is way more selective than in 1999, and there is more skepticism these days than there was then.”
Hollands said despite the tendency in a Dutch auction to dampen the initial offering price, “I think the stock may pop a bit because of the media buzz.” All the hype, she added, is not a good thing. “The valuations being bandied around in the media are staggeringly ludicrous and cannot be sustained by a rational market.”
Other analysts said the market climate is very different. Rich Peterson, market strategist for Thomson Financial Securities Data, said it’s too early to accuse the market of irrational exuberance. “It’s true that deals are up and filings are up, and excitement is up,” he said. “But the backdrop is a rotten first quarter in 2003. The first half of last year, all but 10 IPOs were priced in the US. That was the worst six-month period since the second half of 1975.”
The stocks that saw huge IPOs in the past, such as Palm and Lucent, are not performing well, Peterson pointed out.
For example, look at the dismal performance of two fallen Internet stars that announced earnings Thursday. Homestore, technology provider for the real estate industry, had a net loss for the first quarter of $5.1 million, or $0.04 per share, a lot better than its net loss of $12.1 million, or $0.10 per share, for the previous quarter, but still. And Commerce One,
the business collaboration technology provider that was to transform B2B, lost $0.28 a share. Revenues for the current quarter were $2.7 million, compared with $13.1 million year-over-year and $9.1 million for the previous quarter.
“Google is a different story,” Peterson said. “Running at net revenue of $1.6 billion annualized, it’s a profitable company. The question is, how does it sustain the business model?”
Yankee Group analyst Kelly Ring said that unlike the young Netscape, which popped then faltered, Google co-founders Larry Page and Sergei Brin brought in the highly experienced Eric Schmidt early on. “If you don’t have a management team to keep people focused, it doesn’t matter how much hype there is.”
Moreover, at some point, Schmidt has presumably stepped down from the office of chairman of the board. According to a company spokeswoman, he is now chairman of the executive committee. Such a move could be an effort to bring in outsiders and create a more independent board of directors.
Still, the more things change, the more they stay the same. As the 1999 high-fliers did, Google hired two investment banks that made hay in the bubble years, Credit Suisse First Boston and Morgan Stanley, which have since gotten their white shoes dirty. Credit Suisse First Boston employed Frank Quattrone, the broker who was investigated by both the SEC and the National Association of Securities Dealers for using under-priced IPO shares to secure new business.
Morgan Stanley has been fined twice by the NASD — once for not disclosing potential conflicts of interest. In March, it fired two executives in a branch office that was reportedly the subject of an SEC investigation. And both were among the banks accused in a class action suit of fraud and manipulation of the IPOs of 309 public companies. Those suits were dismissed in 2003.
Perhaps in an effort to keep their bankers’ white shoes — and noses — clean, Google will sell its shares in a Dutch auction, a strategy that serious investors hate.
“Did you see the ‘Letter from the Founders’ in the Google IPO?” asked Tom Taulli, author of Investing in IPOs and a fund manager. “All I can say: short the stock!”
But some applaud the auction idea. “Crazy valuations won’t return to the so-called Internet sector,” said Tom Watson, CIO of the philanthropic services company Changing Our World and founder of @NY, an e-mail newsletter covering Silicon Alley companies.
“Everybody writes about “irrational exuberance” but one of the big factors driving those valuations was the movement of bankers to suck up easy IPO fees — urged
on by the VCs to be sure — playing the hype into traditional investment bank deals with insiders, stock flipping, the whole nine yards. It’s fascinating that Google is essentially preventing that from happening with how they’re doing this IPO. ”
Mark Stahlman, an analyst with Caris & Co., said that no matter how fizzy the market is feeling, “This is a completely different situation. We are no longer and will not
return to the frenzy of the 1990s.”
He said the fact that Google postponed its IPO until it was consistently — and substantially — profitable, combined with the anti-hype measures such as the auction and the dual-class stock, shows that we’re in a different phase of the technology industry.
“Economists who have studied this refer to this period in the growth of any industry as the synergy phase,” Stahlman said. Since we are building a real economic infrastructure, there is no room for boom-and-bust, and things need to become more rationale.” The payoff, he said, is that “growth becomes more steady and more predictable.”
“Call them a new media company,” Stahlman said, “but they are the clearest example of what everyone would like to be. Banks, hospitals, schools, government — everyone will be studying Google’s S1 and trying to draw implications for their own businesses.”
Ron Miller and Pamela Parker contributed to this story
