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May 03, 2004 5:20 pm Google IPO - Buy it, then Flip it ASAP
Melanie Hollands
On the surface, I like the idea of a Dutch Auction (as opposed to a syndicate allocation) for the Google IPO. It seems like the company is doing well, although I'm sure the valuation will be lunacy - but that’s no surprise considering all the hype its gotten. That said, things that don't deserve to go up don't usually stay up over the long-term. But sometimes, the long-term takes a frustratingly long time to play out.

I see some short-term euphoria coming... and if the banks generate enough enthusiasm, then I can see the retail crowd running the stock up. That said, I think (I hope) the “mom and pops” of the world will not be as easily duped by Wall Street mania as they were in the late 1990s. Then again, there are still a lot of stupid, gullible, hopeful and greedy investors out there. However on balance, I think the market is way more selective than in 1999, and there is more skepticism these days than there was then. Canada recently had a “mini-Google IPO” up there for a new lower-cost oil sands company, and it was over-subscribed by 5,000 times!! Of course, many of those were phantom orders to get an increased allocation, but the stock is now underwater.

I'll also be interested to see how the rest of the Internet names behave after the Google IPO. Will getting this supposedly wonderful market event behind us be the reason to sell them? I’m inclined to think so.

Now, Google and the media have been spounting about the more "egaletarian" benefits to investors of conducting its IPO via Dutch auction, compared with the more usual "allocation to the good old boys" syndicate process.

At first blush, a Dutch auction should be a better reflection of pricing to market. It has a number of positives to it. It removes the distortions caused by the syndicate allocation process. It reduces power of bankers and big favored mutual fund clients. (Why should a few hedge funds and large institutional accounts get to make money just because they are preferred clients?)

But I also think this is a “Be careful what you wish for” situation, as with a Dutch auction there’s some benefit to pricing it cheap and placing with follow on buyers. Personally, I've seen a Dutch auction work both ways. Either the investment banks create a bidding war before the stock starts trading, or the investment banks actually price low and then create the buzz for the offering. It’s difficult because investors (and potential bidders) have to come up with the price for the stocks in advance, essentially.

In addition, there’s all sorts of opportunity for collusion in a Dutch auction; it can get real scummy, like closed bids on a house. Think of it this way: everyone wants the item and nobody knows what the other guy is bidding. If I’m bidding, I come up with price on my spreadsheet analysis; a price that, based on the fundamentals and “likely” market reaction, looks “fair” to me. But in the case of Google, we're talking about a stock here, and the truth of the matter is the damn stocks are worth whatever every other bidder in the market is willing to pay. And what I'm willing to pay would be directly impacted by what I think other people who do what i do are willing to pay. So this can create an artificially high bid price – exploiting investors’ greed.

In an efficient market, and in a perfect world a Dutch auction is the best way to do an IPO. But we don’t live in a perfect world, and I don’t believe that we have an entirely efficient stock market. We live in a world where Mary Meeker has more money than I do, anyone with a PC and a cable modem can trade stocks, Abbey Joseph Cohen is not starving to death and is still employed, CNBC is considered a "news" station and Maria Bartiromo a "reporter", not the obedient compliant cheerleader that she is.

The point here is that it is far from a perfect world or an efficient market and the Dutch auctions are designed to exploit those inefficiencies.

So, does Google trade up after the IPO? Sure. Would I buy it in the aftermarket? No. I'd let it settle and then consider adding. I think the stock may pop a bit because of the media buzz. But too much hype in the news is not a good thing. Google's business seems to be sound and I don't doubt that there will be growth there. That said, the valuations being bandied around in the media are staggeringly ludicrous. And the kinds of valuations that are being talked about in the media about cannot be sustained by a rational market.

The hype on this stock alone would be enough to keep me away. And the "Internet auction" format (an investment banker's nightmare) means that any first day stock price pop will be dampened. If I was so inclined as a hedge fund manager, I might day trade it but I wouldn't expect any long term value increase. I think it's quite likely that the stock sets its all-time high in the first week after the IPO.

So, would I plan to play this one? I’d buy whatever I could get in the IPO or at the opening bell and flip out of it ASAP. But as a long-term hold (long-term meaning in this case anything more than a few days) I wouldn’t touch it.


Melanie Hollands

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