When Google went public on Thursday, it immediately became one of the most highly valued companies in the world. Sergey Brin and Larry Page, its co-founders, are now billionaires (at least on paper). And the company raised an immense pile of cash that will stand it in very good stead as it faces an increasingly competitive future. You might think, then, that Google's initial public offering was a success. But that is far from the message from Wall Street and much of the financial press. They prefer words such as “debacle” and “amateur hour” to describe Google's performance. On this view, Google looks like a runner staggering across the finish line, out of breath and gasping for water.
The obvious reason for describing Google this way is that the company had to cut the price of its share offer and reduce the number of shares that would be sold. Wall Street has interpreted this as evidence that Google's decision to circumvent the traditional IPO process - going directly to investors with a “Dutch auction” instead of allowing an investment bank to underwrite its shares - was a terrible mistake. Had the company just given itself over to the Street's warm embrace, everything would have turned out fine.
This is undoubtedly a comforting story for investment bankers to tell themselves as they cling to their lucrative sinecures. But it is, to put it politely, bunk. In the first place, Google's valuation is, by any standard, a quite healthy one. When the company first announced it was planning to go public, most estimated that the company would end up with a market cap of $15bn to $25bn. When trading started on Thursday, it was worth $27bn. The company did have to mark down its price from the initial range it had suggested back in April, but that was almost entirely the result of the recent minor meltdown in technology shares.
If Google's unorthodox method of going public has had any impact on the company's stock price, it is only because it forced Wall Street into a concerted whispering campaign designed to sabotage the IPO. It is hardly a coincidence that after Google directly challenged Wall Street's stranglehold on the capital-raising process, it suddenly went from being among the most-loved companies in America to among the most criticised. Much of the bad-mouthing we heard before the IPO came from money managers looking to talk down the company's price so that they could get a better bargain. One of the more laughable aspects of the whole Google circus has been false sanctimony about “valuation” from money managers who happily bought Cisco when its market capitalisation was $400bn and from Wall Street investment banks that bid internet stocks up to billion-dollar market caps. We can be forgiven for thinking that something other than devotion to the principles of Warren Buffett is at work.
As self-serving as most of these attacks on Google have been, even more dismaying have been the criticisms levied against the Dutch-auction method. Because a Dutch auction in effect allows investors to set the IPO price collectively it makes it unlikely that a company's stock price will soar soon after it goes public. This is an entirely good thing, since the higher the price at which a company goes public, the more money it will raise. But in the looking-glass world in which Google has found itself, the absence of that big first-day “pop” has been labelled a problem, proof that the company is “greedy” and that the whole IPO has been just a greed-fest.
This is a sign of how much of our thinking about markets is deeply confused. The stock market is, at least in part, a mechanism for allocating capital (and during an IPO, that is exactly what it is). The better it does that job, the better the economy as a whole will be. What that entails is getting prices roughly right. A big first-day pop is a sign that the opening price was wrong, not a sign that it was right. As for Google's supposed greediness, it is doing precisely what it is supposed to be doing: maximising the value it gets for selling off part of the company. Because it used the Dutch auction, it knows it is getting what people were really willing to pay, instead of what a coterie of investment bankers thought their friends and cronies should have to pay.
Google's IPO was hardly perfect. But it looks positively brilliant compared with the way Wall Street takes companies public. That route is rife with conflicts of interest and gives investment banks a clear incentive to hold down the opening price - essentially taking money from a company and distributing it to the investment bank's clients and customers.
Wall Street can spin this however it wants. But Google went public without underwriting from a major investment bank, without handing out favours to well-connected executives and without dictating a price in the manner of Soviet central planners. Because it did, it now has hundreds of millions of dollars that it would not otherwise have had. By any standard, this was one IPO that worked.
The writer is a columnist for the New Yorker and author of The Wisdom of Crowds (Doubleday)
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