Google this: disaster

Fund manager Tom Taulli says the comedy of errors leading up to Google's IPO is as much about management hubris as it is bad fortune.

4 min read
The IPO lexicon has a myriad of colorful words, such as "green shoe," "blue sky," "flipping" and "red herring." There is a new word we can add: GOOG-plosion. Definition: IPO disaster.

Ok, perhaps the Google IPO is not an unmitigated disaster. After all, it was no fault of the company that Nasdaq corrected during its road show and Net stocks plunged.

Yet Google has certainly committed a variety of major blunders. While no initial public offering is perfect, investment banks such as Morgan Stanley and Credit Suisse First Boston (which are co-managing the Google deal) have tremendous experience in the IPO process and rarely goof.

As everyone knows, it is Google's two 30-something founders who are running the IPO circus. True, their management techniques have been hugely successful for its search engine business--but these skills do not translate well to the tricky business of raising billions of dollars. This is something that should be left to the pros.

It is absolutely insane to conduct a mega IPO after mid-August.
A couple of the pros, including Merrill Lynch, have opted out of the Google IPO. True, a cynical person would say the reason is that these banks considered the fee structure to be meager (it may be less than 2 percent, according to recent speculation). However, as seen in the past month, there are other good reasons.

First of all, it is absolutely insane to conduct a mega IPO after mid-August. Would it be smart to sell ice cream in January? Not if you are in Massachusetts.

In other words, the IPO market involves seasonality. Simply put, many investors are on vacation in August. Interestingly enough, the Net trackers at Nielsen/NetRatings indicated that the traffic to Google's IPO information site has been tepid at best. In fact, for my site, CurrentOfferings, I purchased the search phrase "google ipo" from, well, Google. Click here, and you can see that the impressions are lackluster.

Another problem is that the initial price range Google set was at the high end of its valuation. In a traditional IPO, it is a common strategy to be conservative at first and then to increase the range, as the IPO gets closer to competition. This creates a sense of frenzied demand.

It also does not help that Google's management has been very reluctant to provide information and answer questions during the "road show" presentations to potential investors. Information is oxygen for investors. If it is lacking, investors will look for alternatives or, in many cases, think about worst-case scenarios.

But perhaps the biggest problem is the use of the Dutch auction, which sets a share price based on potential investors' bids. Again, the Google founders think that Wall Street's traditional approach is, well, "evil" and that the IPO process should be democratized.

Democracy can be messy, and a little authoritarianism can be a good thing--at least for IPOs. You're not talking about politics (though the founders may think that their IPO is a social movement). An IPO is merely a business transaction.

The major irony is that Google has caste system for its shares. Investors can buy Class A Shares, which give only one vote per share. The Class B Shares give management of Google 10 votes per share. Yes, in the strange version of Googlian democracy, some people are more equal than others.

It also does not help that Google's management has been very reluctant to provide information and answer questions during the road show.
The traditional approach to IPOs actually works quite well: Dole shares to major institutions, which makes the capital-raising process much more efficient than allowing many investors--of all sizes--make bids. More importantly, the underwriters can underprice the IPO, which should create a pop on the first day of trading. In other words: To get investors into a deal, you need to make it worthwhile. It's that simple.

For the most part, investors have quickly realized that there is little incentive to participate in the Dutch auction. It makes more sense to just wait. Why go through the brain damage of bidding? It's too much work for no reward. Besides, many professional investors have no experience with Dutch auctions. And just imagine what the frustration level will be for individual investors.

Moreover, a Dutch auction is even more problematic in declining markets. Investors may think: Will my current bid turn out to be too high?

Thus, we are seeing an IPO "perfect storm" for the deal of the century.

With little information in the marketplace regarding Google, it is only natural that conspiracy theories are swarming. One speculation is that investment bankers are surreptitiously trying to undermine the Google IPO. Why? A Dutch auction is a threat to heart of the IPO money machine.

I have my own conspiracy theory. Last week, a reporter asked me, given heavy negative buzz on the Google IPO, if there were any way Google could slow things down and wait for things to get better.

My response: "Violate the quiet period. When this happens, the SEC requires a cooling-off period."

IPOs involve many arcane regulations, extending back to the 1930s. When a company is in the IPO process, it must not hype its operations--a quiet period takes effect.

This week, Playboy Magazine published an interview with the founders of Google and, of course, there were calls that the company violated the quiet period.

True, the interview occurred several months ago. Yet it is typical for a publication to honor a company's wishes not to publish a piece that would violate the securities laws. Could Google be permitting the release of the interview on purpose?

Ok, this seems a bit crazy. But within the twilight zone of the Google deal, anything is possible.