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SOURCE: Knowledge At Wharton

Lessons from Google's IPO

After more than more than three months of filings with the Securities and Exchange Commission, public miscues, pricing changes and enough legalese to make a lawyer dizzy, Google's initial public offering is one for the record books.

Experts at Wharton and elsewhere say Google's IPO, on the surface, seems to be a success, but they note it's too early to issue a verdict. After all, Google did raise $1.67 billion by going public at $85 a share - but that's down from the $135 a share top target, or $3.6 billion, that the company was hoping for. And Google raised its capital largely thumbing its nose at Wall Street's typical method of going public, opting instead to use a Dutch auction that in theory would put shares in retail investors' hands and cut down on commissions to investment bankers.

"The jury is still out on whether the IPO is a success or not," says Wharton management professor Raffi Amit. "The fact that Google did a Dutch auction is a good thing. The company managed to float an offering when 10 deals were cancelled in the two weeks before. Google managed an IPO in a soft tech market."

Wharton marketing professor Peter Fader agrees, to a point. He says the way individual investors chased Google like lovelorn puppies the first day of trading is a sign that some folks will never learn. But if they can't remember lessons from the dot-com boom, maybe they can pick up a few in the aftermath. Here are some lessons from Google's IPO.

Going Dutch Isn't Easy
Amit is a supporter of Dutch auctions, where investors bid on an initial public offering before it goes public. The benefits are clear. In theory, a fair market price is set and the company reaps more cash. In traditional IPOs, prices are set low to ensure a big first day run for investment banks and their clients.

Google said in its regulatory filings that it wanted to make the IPO process more democratic. "Many companies going public have suffered from unreasonable speculation, small initial share float, and stock price volatility that hurt them and their investors in the long run," said Google's documents. "We believe that our auction-based IPO will minimize these problems, though there is no guarantee that it will."

The trouble was that Google initially scared individual investors with a price range topping out at $135. "The goal was to get a different mix of shareholders that wouldn't flip the IPO," says Amit. "Instead, it scared off retail investors and got mostly institutional buyers on the first day. Most individual investors couldn't afford 100 shares." To compound matters, institutional buyers didn't go for the auction system. Scare off retail investors with a high price tag and annoy Wall Street, and you get an auction below your initial price range. "The auction wasn't at the market clearing price," says Amit, referring to Google's first day 15% pop. If the auction had been a complete success, there wouldn't have been a first-day gain.

Fader believes the Google IPO proves the auction system can work on a large scale, but he doubts such offerings will become the norm. For one thing, most companies don't have the clout to force investment banks into doing a Dutch auction. Meanwhile, the fact that Google's auction didn't set a perfect price means doubters will remain. "I do feel the Dutch auction is the way to go because it's more transparent," says Fader. "But I don't see it emerging as a popular method."

Exuberance Persists
The press and adulation of Google leading up to its IPO shows that investors can still go gaga over a new stock just like they did during the dot-com bubble. That fact irks Fader. "I'm skeptical about the IPO process in general," says Fader. "Ego and the hope for a quick buck drive these new stocks."

To Fader, it's clear that many investors chased Google just to get the stock certificate. Such investors want to be involved in a big IPO; that longing is one reason that they will chase a stock even when it's likely it will come down from first-day highs. According to press reports, some investors who bought Google have never bought an individual stock before. "You shouldn't want to buy a stock for a gift," says Fader. "The IPO process brings out the worst in the stock buying. It's gambling. No matter what the ultimate number Google trades at, it has nothing to do with the value of the firm."

Nevertheless, there was a lot of enthusiasm for Google. For instance...

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