Reporters Approach Google IPO with Skepticism

An Internet company and IPO darling invites bidders to bet on its shares, potentially blasting the company's market value into the billion-dollar range overnight. In 1999, that business story could hardly make reporters blink. On Friday, when Google Inc., opened bidding for its estimated $3.3 billion IPO, twice-shy writers are blinking hard and thinking twice.

A few things happened in the last five years – the bursting of the tech bubble, a recession, growing cynicism of the Internet sector -- leaving reporters and editors to approach this grandmother of IPOs with a strong prescription for skepticism.

"The media is more balanced in their approach to the Google IPO than they were five years ago," says David Callaway, editor in chief of CBS MarketWatch.com. "They're reflecting a public that's been burned before by these tech IPOs."

Coverage stepped up again in recent weeks, when Google filed its fifth version of a regulatory filing to the Securities and Exchange Commission, pricing each GOOG share between a whopping $108 and $135 and scaling the highest-priced opening stock for a U.S. operating company by at least $11. By comparison, Yahoo Inc. released its shares upon the public market for the first day at $13 per share, and eBay, at $18 per share. On Friday, Google launched a Web site where bidders can register for the Dutch-auction-styled IPO later this month.

High-priced IPO? Billion-dollar valuation? Internet company??? Talk about prime ingredients for a hype-fest the business press has long feared since getting busted by the bust. But this week's stories show that reporters and editors, healthy from the tech hangover, are more sober about this sector's news.

Even the headlines reflect that hesitation. "Google Flags High Share Price and Risks Ahead of August IPO," declared The Wall Street Journal. A San Francisco Chronicle story asks, "Is Google's IPO really worth it?" In May, BusinessWeek's cover story followed a headline that read "Google: Beyond the Hype" and an even more doubtful teaser, "Why the world's hottest tech company will struggle to keep its edge." This week's issue follows up with an even more guarded story titled, "Google This: Investor Beware: The Web search outfit's business is terrific, but its long-term outlook is cloudy."

The reporters then follow up those headlines with even more "cautionary language": not-so-subtle words somewhere near the nut graph, reminding readers of that far-off memory called the "dot-coms."

Washington Post language: "The stock would be one of the most expensive in history for an initial public offering and would be about 150 times Google's annual per-share profit. Some analysts, pointing out that the stock market's historical price-to-earnings ratio is closer to 20, took Google's announcement as a sign that the Internet bubble was returning."

San Francisco Chronicle language: "Some investors will see Google's sticker price and remember all the dot-coms that were trading for hundreds of dollars a share in 2000 that now are in the single-digits if they're trading at all."

What sets Google apart from those traumatizing dot-coms is its profitability, its growing sales revenues and its socially transformative nature, says Kathleen Pender, a business columnist whose "Net Worth" column in the San Francisco Chronicle contained that last graph. Those qualities transcend hype and fall squarely into the news category.

"We have to write about it," she says, adding that she's received more than her usual summertime share of reader e-mails on the Google IPO. "We can't not, just because we're afraid it's being hyped."

Though, she says she does wonder if an otherwise slow summer news cycle and Google's role in their own daily reporting processes may have contributed to reporters jumping on this story with as much intensity as they have.

"When Google first filed its IPO, I got a little nervous because there was a lot of Google hype on the cover of magazines. I thought, 'Here we go again'," Callaway confides. "But the underlying stories have been balanced."

Regardless of motive, reporters need to do four things to get the tech story right today: Read the documents, do the math, give full context and talk to more diverse sources.

Reading

Reporters need to pore through the company's filings and documents -- in Google's case, the full 200-plus-page opus of a revised registration statement. Especially its section called "Risk Factors," which detail events or circumstances that pose a risk to the company's well-being.

"Read the Risk Factors and understand them," says Pender, who focused an entire column on them in May. "Because they're real."

Do the Math

Learn how to calculate the valuations of companies. Determine the difference between trailing and projected earnings. Compute ratios of stock prices to earnings to see where the company ranks in the industry.

"I don't sense a huge leap on the part of financial knowledge of journalists," Pender says. "Learn about how stocks are priced. Learn about how stocks are valued. Get your numbers right."

Sometimes it's not just a matter of digits. The New York Times and The Wall Street Journal both pointed out in their stories how Google changed the way it reports its revenue, including payments that the search engine company pays to third-party partners for ads on other Web sites. That's relatively dry stuff until the reporters explain that the change allowed Google to report $1.47 billion in the previous year's revenues instead of a mere $962 million.

Give context

Take those ratios and valuations and compare them to those of the competitors. "Look at companies within the universe of the industry," Callaway says. "Do your homework on that."

That differentiates the unrealistically overvalued companies from the surprisingly undervalued ones -- both are stories.

Most of the stories that covered Google's costly shares compared its valuation, which would range from $49 billion to $36 billion, with that of Yahoo, its biggest competitor capping at about $38 billion. Others also pointed out eBay's reigning market value at $49 billion.

Find diverse sources

In yet another of many lessons learned from the tech bust, reporters have discovered the hidden biases of the "unbiased" analysts, who can sometimes hold interest in the stocks they pontificate on in business stories.

Pender and Callaway suggest going beyond the Wall Street analyst -- both sell-side and buy-side -- and dial up investment bankers, brokerage firms, professors, accountants, hedge fund managers and investors for their quotes.

But more often than not, they say, the numbers tell the bigger story than the company's players, who were largely glorified and glamorized as corporate heroes in the boom-era stories.

To that end, one number that Pender says reporters must never disregard: "Just don't forget 2000."

Copyright © 2008 Donald W. Reynolds National Center for Business Journalism