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APRIL 30, 2004
By Alex Salkever Google This: Reality Check The search-engine's eagerly awaited IPO will attract big bucks and ballyhoo. It won't, however, spark a fresh tech boom Google mania is upon us. On Apr. 29, the search-engine phenom officially signaled that it will launch an initial public offering, the first marquee tech IPO since the collapse of the dot-com bubble in 2001 (see BW Online, 4/30/04, "Democracy and Control in Google's IPO") and BW Cover Story, 5/3/04, "Google"). Already, anticipation is widespread that a valuation as high as $25 billion for Google, which made $105 million in net income on revenues of $962 million in 2003, could spark a tech renaissance. In March alone, 23 companies, most of them tech-related, filed to go public, many in hopes of riding the Google wave. It's Netscape all over again -- party like its 1995! Not. Wall Street and Silicon Valley better get a grip. Let's review the lessons of Netscape. Its shares soared 167% from the $28 issue price within hours of its public offering, hitting $75 before settling down to $58 at the end of the trading day. Expect a similar pop and retreat for Google's shares -- but that may be the only real similarity between the two events. NO RUSH IN THE VALLEY. Remember that in 1995, both Wall Street and Silicon Valley viewed Netscape's coming out as the dawning of the Internet Age. Back then, only a few million Americans were surfing the Web. They were doing so over pokey dial-up modems with primitive technology and computers that ran 10 times slower than the current models. But people in the know and Wall Street understood that the Internet held enormous promise. Better and faster information access, remote shopping, faster bill payment, more efficient banking, music delivered over phone wires or other digital means were just a few of those ideas. Today, it's mostly investors who are giddy with anticipation, not techies. This time, "there's more euphoria on Wall Street than in Silicon Valley," notes Paul L. McEntire, manager of the $6 million Marketocracy Technology Plus Fund, based in Los Altos, Calif. The reason: As vast as the market potential for search might prove to be, Google, unlike Netscape, is hardly a proxy for a technological revolution. Dozens of other search-engine companies exist, many with algorithm systems that, by Google's own admission, are close to its vaunted performance. "Google is really part of the Web-portal segment that got started with Yahoo! (YHOO ), Excite, and Lycos. Granted, it's among the most successful of the lot, but it doesn't represent the beginning of a new technology era," says Peter Cohan, an independent tech analyst and consultant from Marlborough (Mass.) THE NEW SOBRIETY. These days, CEOs worried about getting "Googled" are likely more concerned about someone digging up dirt on them on the Web than they are about an upstart leveraging search-engine technology to kill off their company. That's a far cry from the late '90s tech boom precipitated by Netscape's IPO. Back then, fears of getting "Amazoned" spurred businesses to make massive investments in e-commerce technology and infrastructure, including billions to buy expensive computer hardware and networking gear. The Internet also convinced many companies to put a PC on every desk, finally allowing their workers access to this new and useful tool. Similarly, telecoms built networks willy-nilly to service the huge bump in data traffic they envisioned, courtesy of the Internet and the huge economic growth it would spur. Everyone knows the rest of the story. After the bubble burst, the strongest of the dot-com pioneers are still standing, ready for a second wave of technological innovation and wealth-creation (see BW Special Report, "E-Biz Strikes Again!"). And for all the pain and retrenchment of the past few years, the fact remains that the '90s tech boom fostered a broader bounce in the U.S. economy, one that pushed up wages, home values, and virtually everything else except for unemployment and inflation. "Those companies [benefiting from tech] were filled with capital, and they were spending it in pretty extravagant ways, on hardware, advertising, and outlandish parties. That's not going to happen again," says Scott Kessler, an Internet equity analyst at Standard & Poor's. LEADING A RETREAT? Google's decision to go public likely won't contribute much to tech spending overall. While the Mountain View (Calif.)-based concern is known for lavishing perks on its brainy employees, it's notoriously tightfisted when it comes to spending on hardware and software -- Google basically builds its own. "If Google can find profitable ways to invest its IPO cash, it may end up taking market share from some of the incumbents like Yahoo and Amazon (AMZN )," analyst Cohan notes, but "I don't think it will accelerate overall market revenue growth." Nor will a spike in Google stock on the first day likely spark an extended market rally. Many analysts wonder if Nasdaq is already a tad overvalued. McEntire, for one, feels a 10% to 15% correction is due. And even if Google's IPO results in a $25 billion value that's sustained over the long run, the rest of the market is unlikely to feel much of an effect. In fact, although McEntire praises Google, its technology, and business model, he worries that the company could lead a market retreat if initial euphoria results in too high a valuation. "Maybe for a day or two, you'll see a pickup in tech stocks. But as reality gradually sets in and people realize it probably isn't worth $40 billion," he says, "that could begin a slightly overdue correction." BUSINESS AS USUAL. The ultimate beneficiary of the Google hype will probably be the investment bankers who'll pocket some hefty fees. Google's employees who hold stock options will also benefit as a long-awaited payday arrives. And it will certainly make Google founders Larry Page, Sergey Brin, and current CEO Eric Schmidt wealthier than they already are. However, all this is a far cry from a revolution. More like business as usual -- in the days before Netscape.  Salkever is Technology editor for BusinessWeek Online Edited by Douglas Harbrecht
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