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Google's courageous, clumsy debut

CNET's Esther Dyson describes Wall Street's influence on public perception of the IPO and discloses why she thinks its outcome was "reasonable."

For CNET's complete coverage of Google's IPO, see "Google's quest for the gold." For more of Esther Dyson's insights, see the EDventure site.

This is the week that Google is useless as a search term to filter news results, because seemingly everyone is talking about Google.

But a lot of what they're saying, at least in the press, is colored by the people the press is quoting--mostly Wall Street analysts and bankers. Of course, those analysts want to paint the whole initial public offering as a dismal failure, because its Dutch auction process flouted the rules of Wall Street and its gatekeepers. And of course, would-be institutional investors, also quoted, successfully drove the price down from its originally projected--and too high--level. (For my biases, scroll to the end of this column.)

In the end, the company is open about what it says--if a bit smug--and open about what it will not say.

In the end, the market debut worked, if clumsily. It will continue to work--likely with some volatility--over the next few weeks, as trading settles down. The current fluctuations disguise the fact that Google and its original investors got a mostly fair, risk-adjusted price for their shares and that the stock still has room to go up over time as--or if--the company delivers on expectations.

The initial hoopla last spring was driven mostly by the press and possibly by investment bankers hoping to get in on the deal. Perhaps foolishly, the company responded by pricing the deal at a premium to what rational analysts said it was worth. That made sense for a while; indeed, some people suggested that the stock would still be underpriced at well over $100.

Then the backlash began, as potential institutional investors talked down the price in the press, and the IT stock market overall started retreating. Google itself made and revealed a number of blunders, including an atypical bout of excessive openness--an interview with Playboy.

Personally, I'd rather criticize Google for excessive secrecy. But in the end, the company is open about what it says--if a bit smug--and open about what it will not say. It explicitly snubs all the short-term gyrations that have occupied the press lately.

In the end, the only way to test the market for real is to, well, test it--and Google did. It came out with an overpriced offering in response to a fake market--press coverage--and tested the real market, albeit through a complicated bidding process that further annoyed critics. That bidding process showed what the real market was--though perhaps still somewhat distorted by strategic games. As The Wall Street Journal reported--but in a tone unjustifiably indicating failure: The price was what analysts originally predicted.

That is, it was reasonable. It may seem a failure from the point of view of some. And it was--in the short term--too low as indicated by first-day trading. The company didn't get all the money it could have. But it can now continue to hire exceptional employees and give them options in a stock that is likely to go up over the next few years. It avoided over-rewarding its own shareholders, most of whom made the rational decision to sell less (or none) on the offering, expecting that the price will go up later.

The current lurches will continue for a while. The first-day pop after the IPO is short-term noise, a sign of the conflicting agendas and investment or speculation aims of the various players.

The very public Google IPO will make it harder for other companies--whatever IPO method they choose--to reap surplus value.
Over the long term, I think that the market will prove to have worked, and Google's courageous, if clumsy, debut will help it work better for all companies in the future.

The Wall Street Journal also reports that stock-issuing companies won't want to use auction IPOs, because they can see that the prices are lower. Fair enough. Bankers don't really like auctions, either. They like the higher fees and the ability to please their clients, the IPO-ing companies and especially the venture capitalists who control them. ("The Wall Street system is time-tested," intones the Journal, "having priced countless IPOs during the 1990s stock market boom." Some might argue that it failed that test.)

But prices are set at the margin. The very public Google IPO will make it harder for other companies--whatever IPO method they choose--to reap surplus value. With this offering, Google may not have reached the small investors it naively hoped to. But it did do a good job of coming up with a reasonable price and setting an example for other companies in the future. Investor pressure for more realistic pricing of IPOs overall should increase.

As for Google's own future, I don't think that Microsoft or Yahoo will beat it at its own game, but I do think that the search game (like operating systems, browsers and other things) will turn into a commodity battle. Google needs to keep on pioneering. If you look at where things stand now, it has acquired Picasa (photos) and Blogger (guess what?). And it has built Orkut and Gmail. Clearly, more user content--from shared photos and blogging to personalized search--is in order.

To disclose my own biases: I worked on Wall Street as an analyst for five years and left on purpose. I own some Google non-liquid stock indirectly through a couple of venture funds, but I purposely don't want to find out how much. I consider myself, without wanting to be presumptuous, friendly with various people in and around the company, but I haven't talked with them about the offering or about what I say here.

On a side point, I think that the U.S. Securities and Exchange Commission rules discourage candor and force companies to clam up precisely when investors are most curious about what's going on. In the old days--when I was on Wall Street--that might have made sense, because only a favored few could get the news. But now, when you can rewrite a prospectus and post it online in a matter of hours, those rules make no sense. The SEC should foster broader disclosure and dissemination of information rather than less.