| Bidding for Google shares will be steep Friday, May 14, 2004
Google, the leading Internet search engine, has achieved what other companies can only dream about. Its brand name has become a part of the English language, a verb commonly used by people around the world.
Telling somebody to Google it is like telling them to Xerox it. The process has become the product.
On that basis, the initial public offering of the company's shares is expected to generate great excitement. Own the stock and you'll own the franchise, the argument goes.
But the lofty valuation placed on the initial public offering - between $25 billion and $40 billion depending on the calculation - suggests something else is going on. Investors buying into Google could well be succumbing to another bout of irrational exuberance.
Raising that much money would put the price-to-earnings multiple at between 170 and 280, or 10 times what other stocks command on average.
Google doesn't make that much money from its core business of collecting fees from online advertisers - a little over $100 million on revenues of close to $1 billion. (Some critics say it would make much less if it fully expensed the cost of employee stock options).
Sure, that's a nice profit margin of 10 per cent.
But it doesn't justify a multiple in the stratosphere - unless you buy the rationale Google should be valued relative to what other Internet stocks like Yahoo command.
The company is selling itself to investors in a silent auction that seems to lend itself to overpaying.
You open an account with Google, you receive a copy of the prospectus by e-mail and you place a bid for the shares. Starting with the highest bid received, the company works its way down the list of offers until it's sold all the shares.
The lowest offer accepted is the price paid by the winning bidders.
It's unconventional, of course, and that's just the point. "Google is not a conventional company. We do not intend to become one," says its registration filing with the Securities and Exchange Commission.
The auction process is intended to cut out those evil Wall St. firms who usually handle IPOs - and rake off big fees in the process.
The selling of IPOs on Wall St. became a corrupt process during the tech boom, as investment dealers priced new issues on the low side, then watched a big pop in the stock price on the first day of trading.
Getting one's hands on an IPO was a licence to make money and the privilege was often used as bait by Wall St. firms looking for business from their clients.
Look beyond the dewy-eyed idealism of Google's owners: the auction process will raise a lot more money for the company. According to many analysts and observers, it risks hurting the small investor, who will get caught up in the action.
That's not to say Google stock is junk. It's a miraculous search engine - about the fastest thing on the Internet.
But Google is not the only search engine around and is not insulated from competition.
Microsoft, for one, is working on a competing product that would be integrated into its Web browser.
Some analysts have calculated Google's revenues would have to grow at an annual pace of around 40 per cent over the next five years to justify a $25-billion valuation.
That kind of price seems awfully stee
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