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Allan Sloan

Google's New Approach Followed the Same Old Path

By Allan Sloan
Tuesday, October 5, 2004; Page E03

When Google first burst on the stock market scene, the guys running the place sounded like political newcomers attaining public office for the first time and vowing to clean up the place: Mr. Smith Goes to Wall Street, as it were. In Frank Capra's classic film "Mr. Smith Goes to Washington," you'll recall, political naif Jimmy Stewart gets appointed a U.S. senator, goes to Washington and triumphs over entrenched cynicism. In the Wall Street version, head Googlers Sergey Brin and Larry Page sounded like Silicon Valley Stewarts. Instead of modeling themselves on the greed-is-good crowd, they produced stock-offering documents that paid homage to Warren Buffett, one of Wall Street's straightest shooters (and a board member of The Washington Post Co.).

Google is a different kind of company, Brin and Page said. We're more honest. We're not going to cater to Wall Street. "Many companies going public have suffered from unreasonable speculation, small initial share float and stock-price volatility that hurt them and their investors in the long run," they said in their filings. In other words, we won't play the cynical Street game of selling a handful of shares at a below-market price so that our stock runs up from the get-go.

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They've made good on some of their promises, such as forcing the Street to use an auction process that opened the game to public investors, and strong-arming Wall Street into taking lower fees. But one reason the stock has been so strong -- up 11 percent last week, 56 percent since the initial public offering in August -- is Brin and Page let Wall Street play by some of the same crummy rules that have left a sour taste in the mouths of so many investors.

Take the IPO. It was supposed to be an auction matching buyers and sellers -- but it wasn't. Google sold the stock at $85, it immediately ran to $95 and then to $100. While bidders for five shares got all the stock they wanted, big bidders were shorted by 26 percent. This means Google could have gotten a higher price for the shares it sold, or else sold more shares at $85 than it did. Can you spell "artificial scarcity"?

Then came last Tuesday, when Google's so-called quiet period ended and stock analysts of firms that had participated in the offering were free for the first time to offer recommendations. Surprise! All five gave Google high ratings, even though it was a far more expensive stock than at the IPO just six weeks earlier, having risen almost 40 percent. Why any investor took these opinions seriously is a mystery to me -- but the stock soared around 8 percent. It's as if people have forgotten the whole unseemly spectacle of analysts' hyping stocks their firms helped underwrite. Does anything ever change? Maybe not.

Another reason the stock has run so sharply in the past few weeks involves the Fidelity mutual fund house. Fido disclosed on Sept. 10 that its funds owned a total of about 5.2 million shares of Google. That's only about 2 percent of Google's total shares outstanding -- but apparently more than 20 percent of Google's float: the shares available for trading. Although Google has around 270 million shares outstanding, only about 23 million of them are available to public investors, based on my reading of Google documents. The company wouldn't comment on its float (or anything else). Neither would Fidelity.

I think Fido's filing prompted some of its competitors to bulk up their own Google positions by last Thursday. That was Sept. 30, a key date. Funds disclose quarter-end portfolios to investors, and some managers have been known to "window dress" their holdings to make it look as if they've been good at buying hot stocks.

I'm not writing this because I've been consistently wrong in my prediction that Google stock will fall. I'm writing because I'm fascinated by the way that even after a popped bubble and endless Wall Street scandals, the system still works largely the way it used to. Even when a stock issuer like Google says it doesn't want to play the game.

At this point, Google's stock price is going up because it's going up -- not because its fundamentals are 60 percent better than when it sold its initial offering in mid-August. One day, I don't know when, Google will go down because it's going down. At some point, reality will seep in -- it always does -- and investors will begin wondering whether Google can earn enough to justify its $40 billion market value.

Mea culpa: I thought there would be a totally straight auction, the stock would stagnate after the IPO, the hot money would bail, the stock would fall. Oh, well. The next time some Wall Street type pulls a Jimmy Stewart act, I'll remember one of the eternal verities: Never, never, never confuse Hollywood with real life.

Sloan is Newsweek's Wall Street editor. His e-mail address is sloan@panix.com.


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