NEW YORK (CNN/Money) -
Is it true that Google will go public soon? If so, how can I invest?
-- Jean Hyche Jackson, Baltimore, Maryland
Call it Googlemania. Seems like it's impossible these days to read the financial section of a newspaper or magazine or surf the Net without getting a dose of speculation about Google's supposedly imminent public offering.
In fact, if you "Google" Google IPO, you'll get upwards of 253,000 hits. There's even one Web site -- Google IPO Central -- devoted solely to news (and I use the word loosely) about the upcoming IPO.
And the hyperbole: It's the most important IPO in history! It's going to revitalize the tech market! It's going to rejuvenate the stock market! It's going to re-cast the landscape of American presidential politics! (Okay, I made up that last one, but you get the idea.)
The execs at Google have been very hush-hush about the possibility of an IPO. But recent reports have said it could be announced within days.
Which brings us to two questions: How can individual investors get in on this IPO (assuming it does happen); and, more importantly to my mind, should they?
How can I get in?
The answer to the first question depends on how Google pulls off the offering.
Traditionally, investment bankers set an offering price for IPO shares and then allocate them to brokerage firms, which in turn dole them out to their best customers. In the past, some of these shares have also been given to heads of large companies as -- choose your word: incentives, bribes, kickbacks -- for the implicit promise of future business.
Under this system, the people who get shares at the offering price often make a big killing because IPOs, especially eagerly awaited ones, frequently go for much more than the offering price (initially at least) once trading begins.
The rub for small investors is that they rarely get shares at the offering price -- they buy at the higher market price, providing a profit to the big shots.
|Company ||IPO date ||IPO price ||First Trade ||Current Price ||Change from IPO price |
|Va Software (LNUX) ||12/99 ||$30 ||$320 ||$2||-92% |
|TheGlobe (TGLO.OB) ||11/98 ||$9 ||$90 ||92 cents ||-90% |
|Foundry Networks (FDRY) ||9/99 ||$25 ||$114 ||$16 ||-34% |
|Webmethods (WEBM) ||2/00 ||$35 ||$195 ||$10 ||-72% |
|FreeMarkets (FMKT) ||12/99 ||$48 ||$252 ||$8 ||-84% |
|MarketWatch (MKTW) ||1/99 ||$17 ||$100 ||$12 ||-31% |
|Akamai Technologies (AKAM) ||10/99 ||$26 ||$115 ||$14 ||-46% |
|Sycamore Networks (SCMR) ||10/99 ||$38 ||$270 ||$4 ||-89% |
| Source: IPOfinancial.com and Yahoo! Finance|
There's also a rub for the companies going public -- money that might have gone to the company has effectively been transferred to lucky people who got the IPO at what amounts to a below-market IPO offering price.
There has been talk that Google may forego this traditional IPO route in favor of a Dutch auction. In this rare system, the investment bank offers shares at a very high price and continuously lowers it, taking bids at various prices along the way.
All bidders end up paying the price at which the last shares are sold.
So, for example, if the first few bidders agreed to a prices ranging between, say, $20 and $18 per share, but the bid for the final shares came in at, say, $15, everyone would pay $15.
So why not just wait until the price drops to a very low level? Simple. If you wait too long, the shares may sell out and you're left with nothing.
I think this method has the possibility of opening up the process to more investors. Of course, Google hasn't consulted me on this, so I have no idea whether the company will go the Dutch auction or traditional route.
Approach with caution
Either way, however, I think individual investors should approach a Google IPO with extreme caution.
When an IPO is as eagerly anticipated as this one, I think the odds are high that Google shares could get bid into the stratosphere.
So even if Google's future prospects are excellent, people who buy in while investors are in a gotta-own-it-at-any-price frame of mind could end up paying a tab hard to justify on fundamentals such as future earnings power.
In short, even though I wouldn't put Google into the same category as a lot of the dot-com schlock that went public in the 1990s, we could see a mini-replay of that era's irrational exuberance. Which is to say investors might forget a cardinal lesson of the 1990s crash -- that successful investing involves not just identifying companies with good prospects, but also buying them at a reasonable price.
Overpay and you could be in for a subpar return for a long time.
I'd be more apt to sit back and wait for Googlemania to die down before deciding whether to add Google to my portfolio. That way I'd get a better sense of whether it's been priced on the basis of logic or lunacy.
Of course, if you're confident of your ability to price IPOs or you're talking about buying only a small stake with mad-money you reserve for the high-risk segment of your portfolio, then maybe you'll want to charge right in there as soon as you can.
But if you end up overpaying, don't say you weren't warned.
Walter Updegrave is a senior editor at MONEY Magazine and is the author of "We're Not in Kansas Anymore: Strategies for Retiring Rich in a Totally Changed World." He also answers viewers' questions on CNNfn's Money & Markets at 4:40 PM on Mondays.