CurrentOfferings.com Story:

Do your homework on Google or any other IPO

By Shannon Buggs, Houston Chronicle, May 9, 2004

People say they learned a lesson after the high-tech bubble burst in 2000, but the hype surrounding Google's initial public offering suggests many have forgotten some key caveats.

Google filed an IPO registration form with the Securities and Exchange Commission after months of magazine cover stories lauding Google as the Internet search engine that could find anything in less than a second and its founders as the executives who could revive the high-tech economy.

But anyone interested in investing in an IPO, whether it's Google's or any other new offering, can't make a sound decision about whether to do so without understanding the financial documents that describe the deal.

Unlike using Google's search engine, you can't just "feel lucky" to successfully invest in the company's initial public offering.

"It's a bit of a gamble, playing the IPO market," says Tom Taulli, author of Investing in IPOs. "It's like going to Vegas. You have to realize that the odds are in favor of the house."

To increase your chances, read the registration document, called the S-1, and the prospectus, which is filed later.

That may sound daunting, especially after you downloadthe hundreds of pages Google submitted to the SEC from www.sec.gov/edgar/searchedgar/ webusers.htm.

If that sounds boring or like a task better suited for a professional, then you should not invest.

"If you think your broker or financial adviser is taking the time to read all of this, think again," says Michelle Leder, author of Financial Fine Print: Uncovering a Company's True Value.

"It's OK to use them, but don't assume they are reading this information for you."

It will take an hour or two to read the sections that are most pertinent to making an investment decision: the opening letter, financial statements, risk factors and litigation analysis.

If you are willing to plunk down $500 or $1,000 to invest in an IPO but are not willing to spend the time to research the investment, you are saying your time is worth more than the money you may lose. That may be true if you earn $500 or $1,000 or more an hour.

When you finish reading those sections, you should be able to answer these questions:

* Does the company have predictable revenue and profit?

This answer helps you assess if the company's business model is solid.

* What are the main sources of the company's revenue?

You need to know this to determine if the company will be able to continue to make money.

* How are the company's executives compensated, and do you think it's appropriate? It's not a crime for company founders and executives to cash out options or collect big paychecks, but you want to see if the compensation seems to be in line with the company's performance.

* What are the classes of stock, and how are their votes counted?

If the company's leaders maintain control by keeping the class of stock that has the greatest voting rights for themselves, ask yourself if you trust the management to lead the company without much oversight from the shareholders.

* What risk factors threaten the company's growth?

These includes competitors, regulations on the horizon or other circumstances that might limit the company's ability to operate.

* What strategies, products or services does the company have to counter those risks?

These answers may not be explicitly spelled out in the SEC forms, but you can find them by visiting the company's Web site and reading its news releases and published news articles.

* How many lawsuits have been filed against the company, and do any have the potential to cripple it?

Litigation is a big red flag. Play close attention to who is suing the company and why.

This will give you insight into how the company operates.

* Are you comfortable with the company's ability to handle the challenges ahead?

This is the gut-check question.

* How will shares be sold to the public?

Typically, IPOs are handled by big investment banks that steer those first-day shares to their best clients and shut out everyone else.

In keeping with its populist image, Google plans to sell its shares through a "Dutch auction" that, in theory, will allow any interested investor to place a bid for shares through its underwriting firms.

"This will be a massive IPO and a massive auction. It may not work as democratically as they would like it to," Leder says. "But it's a great idea because it takes some of the air out of the IPO feeding frenzy."