Google: the challenges of the proposed IPO
At one level the news that Google is considering holding a massive on-line Initial Public Offering (IPO) is, hopefully, a barometer of the growing revival in technology stocks and Internet-related stock in particular, writes Bob McDowall of Bloor Research.
Two other challenges are likely to dominate the news surrounding the proposed IPO. The first is consideration of an on-line offering method of sale. The second is the perception that Google occupies a near monopoly position in the world of internet search engines.
An on-line offering via a web-based auction of shares in the company would have number of distinct advantages. It would avoid the costly investment banking fees, which invariably accompany an IPO. The price literally would be set by the market than the creative methodologies, which have been devised by investment banks to value web based technology stocks, subject to any underlying reserve price, which the company may wish to set on the stock. Any underlying perceptions in the eyes of potential investors that the price was set to low or that favoured clients were benefiting from preferential allocation on the stock, would be avoided. The stock would mark its debut on the market by a strong display of transparency with the way its IPO was handled and its price would reflect the market price. Integrity and reputation in this context are of significantly greater importance with this stock than they are with most IPOs.
The investment banking industry counters the proposal of an on-line auction. They suggest that an on-line offering will in fact over inflate the initial price, as there is likely to be a huge demand from the private investor, accessing the issue via the web. There will be insufficient stock available to satisfy the overwhelming demand. Equally, they contend, the stock will end up being held in extremely small amounts (from the perspective of the financial institutions and market makers) in the hands of private client investors. Consequently, it will be difficult and costly to make an effective market in the stock post IPO.
A more sensitive issue and one with greater legal and regulatory impact is the role of Google as a search engine. Many contend that Google, by far the most successful of the search engines is a de facto monopoly. If this assertion were proved or at least there were an investigation to determine how pivotal Google was in "the search engine sector", this could postpone or delay the IPO. It could result in Google having to take action to stimulate other competition and ultimately diminish the value and future earnings prospect of the stock.
A more esoteric matter surrounding the IPO of Google is the concern over privacy. If, as is sometimes asserted, Google handles over 80% of the search engine enquiries, it collects huge amounts of information on matters, which affect privacy. Which web sites are visited? Who visits them? With what frequency are visited? By whom are these web sites visited? In the final analysis should Google be subject to some form of public oversight?
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