Google's debut in the stock market sends a mixed signal

In the 1990s, it may have been the closest thing to having Ed McMahon knock on your door and hand you one of those big Publishers Clearinghouse checks: Invest in some high-technology company that was going public for the first time and watch your portfolio rise. Sometimes by 70 to 80 percent. In two hours.

Today initial public offerings (IPOs) by high-tech companies look more like investments in swampland. The mixed response to Google Inc.'s much-ballyhooed public stock offering last week is a reminder of both the perils and promise of the high-tech IPO market.

Amid a series of highly publicized missteps and faint market conditions, company executives had to slash the opening price of their shares from as high as $135 to $85. They also cut the number of shares offered from 25.7 million to 19.6 million.

But when the stock finally started trading Thursday, it jumped 27 percent in two days, closing Friday at $108.31. That put the stock within the range of prices the company had originally estimated, though at the low end. Overnight, the upstart search-engine firm became worth more than Ford Motor Company.

Despite the respectable rise, analysts say the Google IPO does not signal a return to health of the high-tech sector. Nor does it open the door, as many had hoped, to a long line of other IPOs from high-tech or Internet companies.

"Google is such a high-profile and highly successful company that you really can't extrapolate anything from this sale about the high-tech sector in general or other IPOs," says Carl Howe, cofounder of Blackfriars Communications Inc., a marketing and communications firm in Maynard, Mass. "It's not like there are dozens more lined up just like it."

To a certain extent, many of the details of the firm's IPO reflect the peculiarities of Google itself and the way it structured the stock deal. The last-minute drop in stock price also points up a new caution that many investors are exhibiting in the wake of the great dotcom crash of a few years ago. Indeed, as many as 20 firms have delayed issuing IPOs in just the past few weeks, a response both to Google's pre-market travails and a weak stock market.

"There has been this burning desire for the past few months to find the next big thing, the big fish that got away, and so all the focus of Wall Street has been on Google as the latest opportunity," says Martin Weiss, president of the Weiss Group Inc., an investment forecasting firm. "[Investors] of the 1990s have been spoiled to expect drama and hyper growth."

To be fair, virtually no sector is doing well in the market at the moment - and that has been reflected in the drop-off in IPOs in general. In 1999, 486 companies went public with stocks. Through mid-August, 123 had done so far this year, according to Renaissance Capital, a Greenwich, Conn., firm. Only 68 companies floated IPOs last year and 70 the year before that. "There is a couple trillion dollars on the sidelines that isn't buying IPOs or anything else," says David Kotok, chief investment officer at Cumberland Advisors Inc., in Vineland, N.J. "We have major issues that are weighing on the market."

Against this backdrop, Google's initial stock price estimates were unrealistic from the beginning, analysts say. They became the focus of more intense scrutiny as the stock market has stumbled. The company doesn't produce a traditional product sold in a store, and investors have become wary of Internet services that are essentially free to users. "Internet companies have always presented a very difficult environment for the stock market," says Sung Won Sohn, an economist at Wells Fargo Banks in Minneapolis.

Indeed, many believe Google's IPO would have been more successful had it not alienated some investors by being less than forthcoming in sales meetings about the company's plans and fortunes. "It was a very common reaction from investors that when they asked basic questions about the company and ran into a kind of arrogance.... [Executives] were not forthcoming about the business and its plans," says Don Straszheim, CEO of Straszheim Global Investors in Santa Monica, Calif.

In part because of Google's early problems, other companies have delayed offering IPOs. One firm, Thomson Financial, identified 16 companies as of mid-August that had shelved public offerings, the highest number since April 2001. "In general, things don't look good for the tech sector based on all the traditional bellwethers," says Michael Panzner, author of "The New Laws of the Stock Market Jungle."

To some, Google's underachievement before it began trading is rooted in the company's use of an unusual auction method, skirting conventional investment banks that set prices and then take a 7 percent commission fee. But others think Google's attempt at a more populist approach to selling shares could one day spur a wave of IPOs. "This Google sale may some day be looked back on as a watershed event because it led to the development of more open sales techniques," says Meir Statman, a professor at Santa Clara University's Leavey School of Business.

In the end, analysts say, it's too early to declare the lukewarm premarket response to Google - or the moderately strong first trading days - as evidence that either it or the high-tech sector is poised to boom or stagnate. As much as anything, Google's experience may signal that the tech market is returning to the more norms of the pre-dotcom era, when first-day gains for IPOs averaged around 15 percent, rather than the 65 percent of 1999 and 2000.