I’m a financial journalist, but I’ve never pretended to understand the stock
market. Bonds, yes; stocks, no. A recent Reuters
story, for instance, includes this bizarre segue:
“In a deal like that where it’s priced for perfection, anything that occurs
that isn’t right on the number, you get hammered,” said Jim Huguet, chief
executive officer of Great Companies LLC. The Florida firm manages $230 million
in technology shares.
Of the thousands of U.S. public companies in the United States, barely more
than a dozen have prices above $100 per share and trade at least 10,000 shares
a day. As of mid-afternoon Monday, none of the Nasdaq-100 stocks (.NDX) or
the components of the Morgan Stanley High Tech Index traded over $90 a share.
The US stock market is obsessed with dollar price – you often hear people
jumping up and down saying that such-and-such a company just rose or fell $5
on the day, without bothering to mention what the bloody thing is selling at.
This is just another example of the same syndrome: the journalist clearly reckons
that being "priced for perfection" is more or less the same thing
as being priced above $100 a share.
The way I see it, pricing the shares in the triple-digit realm is basically
a way of deterring speculators and trying to ensure, as much as possible, that
the people who enter bids in the IPO are the buy-and-hold investors that Google
is looking for, rather than small day-traders. It probably doesn’t make a whole
lot of difference, but I reckon that a $20 stock going to $24 in the course
of a week is probably slightly more likely than a $130 stock going to $156 in
the same timeframe. So if you want to decrease volatility, price high.
The key way that Google is ensuring low volatility, however, is through its
use of a Dutch auction. I’ve touched
on this before, but basically the price is set by investors, not underwriters,
which means that no one’s going to buy with the intention of selling almost
immediately. Daniel Gross says
in Slate today that "most professional investors will likely boycott the
offering" – but that doesn’t really matter: they’ll have to buy sooner
or later (and sooner rather than later, I think), and so will provide a natural
offset to the phenomenon of the "winner’s curse" which is often associated
But amidst all the concentration on the style of IPO that Google has chosen,
I get the feeling that people are overlooking some rather obvious questions.
So, here are two of my own; I’m sure there are more. If anybody would like to
hazard an answer, I’d be very interested.
1. What’s with the fees and the underwriters? Google has two
lead underwriters – Morgan Stanley and CSFB. Normally, IPO underwriters
have a lot of work to do: they have to value the company, set an issue price,
and market the shares to investors. In this case, they can basically sit back
and let the internet do the work for them: they simply issue the prospectus,
wait for the bids to roll in, and then use those bids to set the offer price.
Not a single phone call needs to be made to a single investor.
Daniel Gross says that "to add insult to the injury of the chastened investment
bankers, Google has decreed that it’ll only pay a 3 percent underwriting fee"
– but in an offering that could reach $3.3 billion, a 3% fee comes to
an extremely respectable $100 million. Does anybody really think that the banks
are doing $100 million’s worth of work on this deal?
Even more puzzlingly, Google has taken its two lead underwriters and saddled
them with 29 – count ‘em – extra
underwriters, comprising pretty much all of Wall Street and then some. What
on earth are 31 underwriters supposed to do in this deal? They’re not drumming
up investors, so what’s their role, beyond earning fees?
2. Why is Google selling 14 million shares? A large part of
the reason why Google didn’t go public ages ago is that it has no need for cash.
It is minting money, actually – even after paying for what is probably
the largest, most expensive and most sophisticated server farm in the world,
it made $79 million last quarter, and is now sitting on $548 million in cash.
That’s enough money to buy one hell of a lot of Bloggers:
it’s hard to see what use the present half-billion is to Google, let alone the
$1.7 billion or so it stands to receive from the IPO.
There are, of course, good reasons for the IPO beyond raising money for Google.
Most obviously, Google was funded with venture capital, and venture capitalists
want an exit strategy. Existing shareholders are selling about 10 million shares
in total, which is much more than enough to give Google an unambiguous stock-market
valuation and, should it need it, a currency for further acquisitions. My question
pertains to the 14 million shares Google is selling over and above that number,
with the proceeds going, we’re told, "for general corporate purposes".
If Google is already profitable, what use has it for having $2.2 billion sitting
in the bank?
Raising equity, for a company like Google which is likely
to sell at more than 150 times its previous four quarters’ earnings, is cheap.
But even so, is the accumulation of an enormous pile of cash really the use
to which Google shareholders would like to see the company’s equity put? Or
is there (and I’m genuinely ignorant here) some kind of rule which says that
a company has to sell at least as many shares in an IPO as its existing shareholders
do? Absent such a law, I simply can’t see why Google is doing this.