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08/18/2004

Google’s IPO Disaster: At $10BN, The World’s Most Expensive Roadshow

With the news this morning that Google has slashed the size of its IPO almost in half, it’s fair to say that the Google IPO will go down as one of the worst managed in history. With Google’s brand cachet and stellar financial performance, its IPO road show should have been the equivalent of a glorious victory parade complete with fawning crowds and thunderous cheers in which moving $3.5BN worth of stock at a fair price was a piece of cake. Instead, the IPO has been a comedy of errors and hubris in which the company has violated almost every principle of how to complete a successful IPO.

A few of the IPO commandments that Google has violated include:

1. Thou Shall Show Respect For Institutional Investors: IPO’s are not bought, they are sold. This means that a road show is actually a series of sales meetings. If you are selling something it is generally a good idea to A) show your potential customers respect and deference B) go out of your way to address their potential concerns and issues. I have talked with a number of institutional investors that attended the Google road show and the feedback was uniformly negative. One investor went to a lunch presentation. She was told to show up an hour before the lunch started (which is ridiculous given how busy buy side people are and shows a complete lack of respect for their time). She was also required to show her driver’s license when signing in (something unusual and largely pointless). After all that, the meeting started about ½ hour late (once again showing no respect for people’s time) and the management team started off by making a number of lame jokes that clearly were not appropriate. During Q&A, the management team responded to a question about their relative lack of disclosure compared to their competitors by basically saying “we really don’t care what are competitors disclose and we don’t feel the need to give you any more information”. Now I am not a salesman, but I don’t think that the Google roadshow team is going to be writing a book on the “10 Habits of Highly Successful Salespeople” anytime soon.

2. Thou Shall Make Everyone Money: Google’s auction approach has some merit for certain types of deals, however the company made a huge error by presenting the auction within a “holier than thou” context basically holding Wall Street in contempt and implying that they wanted to make sure no one made any real money on the IPO. An IPO is just the beginning of a long term relationship with Wall Street. As such, it is highly advisable to make sure that those investors that take a risk and buy your stock at the IPO receive at least a modest immediate reward. That way, whenever you come back to market, chances are that everyone in the institutional community has a good feeling about your stock. Most IPO’s try to target a 10-15% increase the first day. They do this not only to build good will with the institutional community, but to give people a reason to buy shares in the IPO as opposed to waiting for the aftermarket. In Google’s case, while it was always believed that they would set the actual IPO price 10-15% below the clearing price, they never really came out and said that. This created great uncertainty in terms of how the IPO would trade, especially given the large retail component of the offering. Because of this situation, most professional investors seemed to believe that the offering had very little aftermarket upside. Even if they thought that the deal might trade up 5-10% that kind of edge still didn’t fully compensate for the uncertainty, so most appear content to just wait for the aftermarket (if they intend to buy at all).

3. Thou Shall Not Price An IPO In The Latter Half of August: This is a pretty basic tenant of the IPO market. The latter half of August is the unofficial vacation period for most of the investment community (and all of Europe). As a result, the market in August is typically very thin, choppy and usually quite weak. (I had the misfortune of being involved in an IPO that priced in the second week of August and I will never make that mistake again.) While Google clearly had the raw talent to get a deal done in the latter half of August, this would only work if they showed respect for the rest of the IPO process. With the convoluted auction process, the non-sales oriented road-shows and the lack disclosure, I think it’s safe to say they did not show a lot of respect for the process. Instead, most people in the investment community took their determination to price a deal in latter half of August as simply one more sign of the company’s hubris.

The lesson in all of this is that no matter how “hot” you think your IPO is, it’s important to remember that as far as investors are concerned all stocks make the same thing: money. While I doubt there has been any concerted attempt to coordinate a boycott of the IPO, I think it’s pretty clear that Wall Street is sending a collective message: We don’t care how “hot” you think you are, we have over 10,000 stocks to choose from and unless you show us some respect you won’t be one of them.

A couple months ago I wrote a piece in which I theorized that Google would likely be worth more than Yahoo! based largely on Google’s equivalent profits, but higher growth rates and margins. At the time I said, the only thing that would prevent this is if the company did a poor job on the road show and if investors found fault with Google’s disclosure and guidance policies. With the IPO valuation at the top end of the range now down from $36.6BN to $25.8BN it looks like Google’s “quirks” will cost its shareholders, at least temporarily, over $10BN. The irony is that if Google just played by rules (like Microsoft, Cisco, EBay, and Yahoo did) there’s a strong chance they would have priced at the top of their initial range. I guess this makes the Google road show the most expensive in history. I hope they enjoyed it.

August 18, 2004 in Wall Street | Permalink

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The thoughts and opinions on this blog are mine and mine alone and not affiliated in any way with Inductive Capital LP, San Andreas Capital LLC, or any other company I am involved with. Nothing written in this blog should be considered investment, tax, legal,financial or any other kind of advice. These writings, misinformed as they may be, are just my personal opinions.