Bidding on Google: The Thrill of the Discount

A reporter tastes the fruit of success after taking part in the investing world's game of the year.
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Updated from Aug. 19

In the end, bidding on

Google's

IPO was like voting in the presidential election.

My particular choice didn't make much of a difference. What mattered was how everybody else voted.

And, as is usually the case at election time in the U.S., the system worked. The search engine company and its shareholders had announced July 26 that a certain number of shares would be sold within a certain price range. But this week, a mass of investors in effect said, "No, you'll be selling significantly fewer shares at a significantly lower price." And that's what happened. One can't know whether the company could have raised more money in a conventional IPO, but it looked like the auction didn't fail. The people spoke, and their voice was heard.

Their voice continued to be heard Thursday and Friday, when, contrary to the predictions of Wall Street's many doomsayers, the stock surged, offering a ray of sunshine after several cloudy days in Googleland. Google ended up jumping 18% Thursday and an added 2% Friday, putting it at $102.50.

In any case, the Google IPO has been an illuminating excursion into shareholder democracy. Only rarely do individual investors get such a straightforward, equal-opportunity chance to participate in what is usually a privilege of Wall Street's aristocracy.

By participating in the Google IPO or by walking away from it, investors helped turn an event with relatively few participants -- the setting of a price and volume of an IPO -- into one with many participants.

But the flip side of that, as investors in Google may discover, is that such a privilege -- like that of investing in, say, a hedge fund instead of a FDIC-insured savings account -- brings with it not only the opportunity to make big money, but the opportunity to lose it as well.

As with a presidential election, if things go well for you after the IPO, you can thank the crowd for its collective judgment -- setting a price for Google that's fair and reasonable. But -- and here's the big difference between the presidential election and the Google IPO -- if things go wrong, you can't as easily blame it on the crowd. It's your own high bid that's to blame.

To get a taste of what it was like to participate in what has been the most anticipated IPO of a very young century, I started out Aug. 3 with the Web address of Google's IPO center --

ipo.google.com -- plus the permission of my editors at

TheStreet.com

. (See the disclosure blurb at the bottom of this page.)

Supplying a few basic details about myself, and representing myself as a "U.S. Person," I obtained a 20-digit bidder ID -- a necessary, but not sufficient, element of any subsequent bid for Google.

Twenty digits? I wondered. Isn't that a little excessive? After all, no matter how flooded America is with credit cards, the nation's card issuers for the most part have their bases covered with 16 digits, enabling about 999 trillion different card numbers apiece. How many people did Google think would be bidding on its IPO?

Anyway, once I had my bidder ID, there was nothing to do but wait until the registration period to close. Nothing to do, that is, but wait for bits and pieces of news to leak out about the IPO. First came chatter of a one-week delay. Then came Google's disclosure it had settled disputes with

Yahoo!

(YHOO)

related to various patents and Yahoo!'s claim on certain Google stock.

Finally, on Friday, Aug. 13 -- when the registration ended and the actual bidding began -- I scurried on over to the Web site of my existing online broker, where it was time to find out whether I passed the brokerage's suitability test for participating in an IPO. The questions, which I answered truthfully, were for the most part sensible and straightforward, covering topics such as my household income, liquid net worth and whether I was an officer or director of a public company.

Clearly, the highlight was this yes-or-no question in the investment experience section: "Are you aware that the stock market has basically been and may continue to be volatile and that aggressive growth stocks, which may generate returns higher than the overall stock market, generally involve a higher level of investment risk?"

Hmm, I thought. Tough question. I wonder how many people got knocked out of the IPO process by coming up with the wrong answer to that one.

The upshot was that, by some formula unknown to me, I was indeed found suitable for participating in Google's IPO.

Which led me to the question that I and other investors have been struggling to answer: What's a share of Google worth?

Short answer: Who knows?

Longer answer: A lot of reasonable people disagree.

In its offering documents, Google suggested a range of $108 to $135. Of course, just as parents aren't always the most objective judge of their own children, Google's suggestion isn't necessarily a good starting point.

Which led me to Wall Street's research on Google -- research that, at this stage in Google's life, is limited by the silence of the 28 firms involved in the offering.

Among the few sell-side brokerages or research-only firms that have published reports on Google, the estimates are all over the place. In late July, Jefferies & Co.'s Youssef Squali calculated a fair market value of $125 to $130 per share. Last week, Martin Pyykkonen of Janco Partners suggested $76 a share.

The general opinion -- not the universal one -- is that, whatever measure one uses to value Yahoo!, Google should be valued at a discount to Yahoo! because of several negative factors at play in a Google investment that aren't at play with Yahoo!. Among other downsides, as Pyykkonen notes, are Google's undiversified revenue, a two-class shareholder structure that puts Google's founders firmly in charge and Google's plans not to provide earnings guidance -- a policy that, Pyykkonen says, will undoubtedly contribute to Google's volatility, especially around earnings season.

There's also the nagging question of if and when the market will be flooded with additional Google shares following the IPO: Within 90 days of the IPO, lockups will be expiring on 43.7 million Google shares, dwarfing the 25.7 million shares investors are clamoring over in the IPO.

So what to do when faced with the chasm between $76 and $130? Split the difference, and go with a third analyst, American Technology Research's Mark Mahaney. In a presentation Mahaney made to investors, he offers a wide range of potential valuations for Google stock, but triangulates on $108 to $109, a 25% discount to Yahoo!, by his calculation.

So I go with Mahaney, giving in to the slightest bit of optimism and bumping my bid up to $110 a share.

More news trickles out: The

Playboy

interview that may or may not delay the IPO. Disclosure of a

Securities and Exchange Commission

inquiry into old options grants. A request that the SEC declare Google's

registration effective as of Tuesday's market close -- a request that, for reasons still unknown, isn't granted.

Finally, on Wednesday, Aug. 18, the big news arrives: Fewer shares are coming on the market than previously forecast, and the new expected price range for the shares was $85 to $95.

All of that muttering in recent weeks about the expense of Google's shares, the limited guidance and the capital structure hadn't been simply trash talk. It was a reflection of what people were willing to bid for the company. So much for the power of Google's $108-to-$135 suggestion.

A few minutes after 4 p.m. EDT, the SEC declared Google's registration effective. Some five hours later, Google sent out notices indicating that the offering price was $85 and bids on the stock had been accepted. Given that my bid was $110, $25 over the offering price, I could assume I was the proud owner of five shiny new Google shares.

(Actually, I found at midday Thursday that, like other investors, I hadn't been

allocated all the shares I sought to buy. I ended up with four out of five. That was a bit of a bummer. On the other hand, those shares cost me something like 23% less than I was willing to pay on a per-share basis.)

So with the stock rising 18% on its first day, I enjoyed that giddy feeling often felt by people whose portfolios show big gains. Such giddiness, of course, makes no sense at all in the grand scheme of things. At this point in my investment adventure, I'm only $60 richer on paper. That new-found wealth will no doubt be eaten up by a brokerage commission and taxes on any gains. And whatever profit remains, if any, I'll be giving away.

I also discovered that, unbeknownst to me, my brokerage firm had threatened to lock me out of the IPO. When I logged on to my account Thursday, I found two urgent messages waiting for me. One, which had arrived Wednesday morning, informed me that because there had been a material change to Google's prospectus, I needed to reconfirm my bid. "If you do not reconfirm your bid at this point, YOU WILL NOT BE ELIGIBLE to purchase shares," read the message.

A message that arrived Wednesday afternoon told me to disregard the earlier warning, because prospectus change hadn't, in fact, been material.

Wow. Even though it had been a false alarm to which I had been oblivious, the possibility that I might have missed out on the IPO of the century gave me a momentary scare. Such has been the power of Google in my life.

So after this head-spinning process, I'm quite aware that my participation in the Google IPO experience was small and insignificant. But it's still a thrill to feel like I got a bargain.

At the time of publication, Mannes had no positions in stocks mentioned other than Google, which he was long for the purpose of reporting on the auction process.

TheStreet.com

has waived the provision of its Investment Policy with respect to Mannes' ownership of the stock solely for the purpose of writing stories on Google's IPO. Mannes has agreed to sell his shares as soon as possible following his brokerage firm's 30-day "no-flipping" window for initial public offerings. As the situation warrants, he will be reimbursed by

TheStreet.com

for any losses, or donate any gains to a charity to be named later.