Why not to Bid on Google IPO
I’ve been resisting the urge to say anything about the Google IPO, but since Dan Gillmor has asked the question, I’ll add in my comments.
First, it was surprising to see a Silicon Valley influential being critical of the deal. Most of the SV influentials have already been cut in on the deal.These people who got insider pre-IPOdeals stand to profit a lot even if the price crashes a matter of months after the IPO. In other words, as long as suckers like you buy into the IPO, none of the SV luminaries who are driving the ?market appetite?will get hurt. I was shocked to read that Gillmor did not get any pre-IPO cut of Google.
Now, I think Gillmor misses the point by talking about ?investment bankers want to see this fail, because then they could say it validates the old-fashioned way of doing IPOs?. He misses the point, because to rate something as a success or failure, you have to define what you are trying to accomplish. What is Google trying to accomplish with this IPO? Are they trying to raise capital for expansion and growth? I don’t think so (they already have plenty of money for that). Are they going public to allow more public control? Obviously not, since they explicitly neutered the voting rights of public stock. The only reasonable conclusion is that Google is offering an IPO for none of the traditional reasons, and therefore it would be silly to evaluate success or failure based on those traditional criteria.
I’m not an expert, but I think that the Google IPO is designed to accomplish two things:
- Employee Retention - Google needs really smart people who work really long hours for little immediate reward. Paying them with stock options that vest over a long period is a great way to retain these young and restless people. Stock options do not eat money from the operating revenue at first, so it’s almost like paying your employees for free. And the perceived value of the stock options (and correspondingly the value as a motivation and retention tool) is limited only by the ability to hype the stock to the gullible public.
- Sergey, Larry, and EricGraduation Plan - Sergey and Larry plan to cash in for $100 million each at the opening of the IPO. They saw what happened to Mark Andreesen, who was forced to ?vest? his share of the IPO that started the famed Internet bubble, and as a result never quite graduated to the level of top Silicon Valley baboon. With $100 million each, Sergey and Larry will be safely in the ranks of SV leadership and will be able to stay near the top of the heap even if Google fails miserably. This is their insurance policy, or ?retirement plan?. Of course, if the top three baboons at a company do not have enough faith in the company to invest their $100 million in the company, you might ask yourself why the public would want to donate $30 billion to that same company. There is a reason why most IPOs do not let the CEO cash out at the top, and I think we are all going to get a demonstration of why this is.
Now, in those terms, I think the Google IPO will be wildly successful. It will succeed in making it’s top layer of executives completely isolated from any potential bad effects of poor company performance, while motivating and locking in key producers within the company.
So there is really no question about why Google would file this IPO. The real question is why on earth would anybody buy it?
Essentially Google is approaching the general public and saying, ?Could you please give us $30 billion? If you give us this money, we will use it to give our executives a lavish and extravagent payday. We will use some more of the money to give our friends a slightly less extravagent payday. We will also use it to promise some of our employees the possibility of a large payday. Besides this brilliant investment strategy, we have no idea how we will spend the rest of the money. For giving us this money, you will have no rights. But if you convince enough other people that we really rock, your stock price might go up and you could buy some pie for yourself! Mmmmm, good!?
I’ve concluded that the interest in the IPO is more emotional than reasonable, and to an extent that puts even the Netscape IPO to shame. I think that people are mostly excited about this IPO because they secretly harbor a desire to return to the high-flying days of the Internet bubble. They tell themselves, ?This Google IPO might just be a way to kick-start another bubble, and even if this bubble does not last as long, I’ll cash out early enough this time and make up for the chances I blew in 1995!?
And Silicon Valley cannot pass this opportunity up. The nineties were nothing if not a massive transfer of wealth from the heartland baby boomers’ pension funds into the hands of theSV players. The Google IPO is perhaps the last big heist that the SV players can hope to pull off, the last aftershock of the bubble before Soros’s predicted contraction begins in earnest. In recognition that this might be the last great heist, the valley is pulling out all the stops and employing every emotional manipulation technique mastered over the past decade. The quiet buying off of the valley celebrities has already made most of the valley willing accomplices. Many do not need to be purchased; the simple promise of more bubble juice has the whole valley slobbering in unison. Now Google has gone on a shopping spree and bought up as manyrock star marquee namesas can be found in preparation for the IPO. The Netscape IPO proved that rock star power (Andreeson, Bina, etc.) can really jack up an IPO price, so Google has gone all out. Nevermind that Bosworth and Bloch have probably not yet found their desks, and nevermind that you have no idea whether either guy will still be at Google four years from now when the stock price is worthless; their mere presence is enough to create buzz among geeks in the hallways and start a frenzy of speculation about ?Google might be planning to make the uber-duper-snitzer-snazzen; I better INVEST NOW!!?.
So what is my advice? I would suggest that you ignore the emotions for a minute, and objectively write down exactly what you expect to get by giving your money to Google. You might find it’s better to just go give your savings to Sergey right now, and set aside $1 to buy a lottery ticket.
Revision: I can not locate an original source which names any journalists cut in on the Google deal, so I have removed comments about ?including journalists? above. Complete information about people who stand to profit from ?market appetite? is currently not public, and so it is impossible to categorically confirm or deny that journalists are among those people. In the lack of complete information, I would simply urge readers to pay attention to journalists disclosures (for example, Gillmor’s assertion that he has no part in the Google deal), and pay special note to the lack of such disclosures by journalists writing personality puff pieces about the IPO.