Ok folks, time to open your wallets, call your brokers, or join an online trading site. If you missed out on the big Internet stocks of the late 90’s, or lost your savings on the bubble burst- well, it’s time to make it up. Google plans to announce within days that it will push forward with an initial public offering, reports CNN and The Wall Street Journal.
Sure, your stock in Yahoo, FindWhat and Ask Jeeves is doing fine… but wait. Google, the most powerful of all search engines, is rumored to be going IPO. Woohoo! Time to rake up. What will they open at? $5 a share? This could be the chance to double or triple your investment in one day. I mean come on, everything looks sunny side up, doesn’t it?
* Google IPO rumors have been on the rampage since last October, with some Wall Street folks valuing Google at as much as $25 billion.
* Google will soon be required to disclose publicly more information about its business, under a Securities and Exchange Commission rule triggered after closely held companies surpass a certain size.
* According to analysts, Google is expected to have to make such disclosures as early as next week and such disclosers usually trigger a demand for such a company to offer public shares.
It all looks like cake. Google files, they get rich, so do their investors. However, some tech people, including Ensight’s Jeremy C. Wright, think otherwise. Jeremy sees the Google IPO as being, well, evil.
My primary reasons for opposing the hype around the IPO (more than the IPO in particular) is that it will help in creating a bubble-type mentality, it will get a disproportionate amount of smaller investors involved, it will focus an illogical amount of attention on tech and it will, overall, raise the level of expectation across the board.
First, let’s run through a couple of sample scenarios. When Google IPO’s it will either be really good or really bad. Some people might disagree with the ‘really bad’ part but too bad. Google is, apparently, a good company. There is a huge difference between a good company and a good stock though. So, drop the whole good company thing and what you have is a company trying to prove itself on the stock exchange just like any other.
So, there are two things that could happen when Google IPO’s. Either it will be really good or really bad. If it’s really bad obviously loads of people will be burnt and it will be a disaster. I’ll get into the hows and whys in a minute, but suffice to say that in my opinion, a good IPO will have far more disastrous effects than a bad IPO.
Before the IPO there is hype. As a result of hype, people who otherwise wouldn’t have ‘invested’ in tech or in stock are saving money, borrowing money, opening margin accounts, signing up for online trading accounts, etc….Once again small-time investors are getting in, a company is getting a huge amount of press before the IPO is even announced, people are borrowing to be able to buy.
And if it’s a bad IPO? These people will lose money, sure, but they will also lose confidence and they will tell their friends. A bad IPO will set tech back about 5 years.
A good IPO will be much, much worse than a bad IPO? Why, for the exact same reasons as why a bad IPO would be disastrous. Let’s run the scenario. Half the people who could invest in Google do. They make some money (most of them). They tell their friends. The next time a tech IPO comes around, they play the game again, and win again. They tell their friends. By the the third time, everyone in town is playing the game. Eventually something gives out. Billions are lost.
Google, please don’t IPO.
Ok, well it may be difficult to argue the Google IPO being… evil, especially when compared to a mining company. Jeremy goes deeper into his IPO worries:
The “pro Google IPO” camp (if there is such a thing) seems to basically base their opinion that this will be a fantastic IPO on two basic points. The first is that this isn’t the tech bubble of before. It took months for that bubble to ramp up. The second is that Google is a “good company”.
Let me tackle these quickly by saying “I agree”. I really do. It isn’t the tech bubble. And Google is, apparently, a “good company”. However, I don’t believe that has any bearing on the IPO or the potential for harm to tech investing as a result of this IPO.
First, the “this isn’t the bubble” argument. As anyone will remember it took nearly 4 years for the bubble to get into full swing. The issue is that this isn’t the beginning of a new bubble. There is a nascent expectation. There are 2 million investors lined up to gobble up IPO shares. This simply isn’t the same environment as the last tech bubble so anything about it doesn’t really apply.
Second, yes Google is a good company, as far as we can tell. However, there are two fundamental things that will change once the IPO happens. First, it will be a public company, forced to be scrutinized in ways it’s refused to be before. Second, there is a massive difference between a good stock and a good company.
Restating the Original
Before I restate my position let me say that I have nothing against Google. They ‘done good’ with search technology and have, overall, helped the Internet tremendously in my opinion. Good company? Every profile I’ve read says yes. None of this has to do with Google as a company.
So, my position is essentially this.
Good IPO: people make money, they tell their friends, expectations are unnaturally high (even more so… average tech stock is already in the 60-70 times earnings range… not quite at the bubble’s 170-220 range, but still unnaturally high). More people invest, we’re right in it again.
Bad IPO: Well, if it’s a bad IPO 2 million investors have lost money and faith in tech is set back 2-3 years. Not really as bad as if it’s a good IPO, but bad enough.
So, again, nothing against Google. Mainly this is against tech sentiment, nascent hope and unrealistic expectations for a repeat of the ‘get rich quick’ opportunity that the last boom afforded.
Good IPO or bad IPO, given Google’s success and income, they may have to go public next week. The Search Engine Journal will bring you such news as it happens and looks forward to the final verdict on this looming IPO. Special thanks to Jeremy at Ensight for bringing this Google IPO commentary out into the open.