Google IPO Primer

Although there is quite a bit of hype surrounding IPOs, it is usually difficult for an individual investor to buy an IPO. Investment banks generally sell IPO shares to money management firms and other favored clients.

However, ever an innovator, Google is proposing to structure its IPO to enable almost anyone to get a piece of the action. Specifically, the company will sell shares through a "Dutch auction," which means a fixed number of shares would be sold directly to the public at whatever price institutional and individual investors are willing to pay.

While individual investors would most likely need to purchase shares through a broker, they could have access to the Google IPO through this system, which is still relatively unusual in the United States. In fact, fewer than one dozen companies have used the Dutch auction system to go public over the past several years. Most recently, Peet's Coffee & Tea and Overstock.com used similar auction methods to launch their respective IPOs.

While the Dutch auction enables smaller investors to get into the action, Google stock could be in for a volatile, wild ride. Often, the winners of the auction will try to immediately unload their stock to make a quick profit.

In case you're considering getting in on the action, here are some things you might want to think about:

What could the value of the business be? Google already takes in close to $1 billion in annual revenue. The company reported operating profits of $347.6 million in 2003. Currently, it is estimated Google might be worth $15 billion to $30 billion after the public stock offering.

Where have all the IPOs gone? In the 1990s, an average of 155 tech companies went public every year. In 1999 alone, 295 U.S. tech and Internet-related startups went public raising more than $34.6 billion. However, the IPO market has been on the decline since 2001. For example, there were only nine tech-related IPOs in 2002 and 17 last year. In total, 2003 saw the fewest IPOs in the United States since 1979.

Is Google a good investment? Technology, as a whole, is often a risky investment because of competition and the potential for obsolescence. In Google's case, the license on its proprietary search engine technology expires in 2011 — in effect, opening doors for competitors like Yahoo! and Microsoft.

Furthermore, of the 10 IPOs with the biggest first day surges since 1975, not one ever returned to the price it received in the first day, according to an analysis of data from Jay Ritter, professor of finance at the University of Florida. Past hot-issue IPOs like AT&T Wireless which came out to significant public fanfare in the year 2000 faded fast. Despite a strong brand and quickly growing market, the stock fell from its initial price of $35 and steadily declined and dropped below $4 a share in October of 2002. Although Cingular eventually acquired AT&T Wireless for around $15 a share, it was at a significant reduction from the original IPO price.

That said, most amateur investors should be very cautious when investing in an IPO. Without an established track record and a clear earnings history, it can be a speculative and risky investment.

Mellody Hobson, president of Ariel Capital Management (arielmutualfunds.com) in Chicago, is Good Morning America's personal finance expert. Ariel associates Matthew Yale and Aimee Daley contributed to this report.

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