Stunning success, not a failure

IF Google, the internet search engine, had successfully floated on New York's Nasdaq exchange yesterday at the upper range of the initially mooted asking price, it would have been valued on an earnings multiple of 329. It was forced by weaker-than-hoped-for demand to slash the price of the share issue. But having floated at $85, the bottom of the range of its already-reduced estimates, it was still on a price-earnings multiple of 207.

Bear that in mind when you read about the Google float being a failure and how its management was cut down to size by shunning Wall Street investment banks and trying to organise the float itself. The average multiple of Wall Street stocks is around 20. Google therefore came to market at a price 10 times the Wall Street average. That is a stunning success, not a failure.

The fact is that Google's auction worked. The management made some silly mistakes and did not get the highest possible price, but anyone who has ever sold a house knows that you always try it on to start with, just to see if anyone is stupid enough to bite, before accepting a more realistic price later.

So it is with Google - it still got far more than anyone would have predicted a few months ago from looking at the valuation of its nearest competitor, Yahoo!. It still got a price that is so high as to be utterly absurd, given the risks of the business and the likelihood of it being wiped out a few years down the line by some as-yet unknown competitor with as-yet uninvented technology. It is still a business less than a decade old which is now valued at so many billions the founders could not possibly spend their cut in a lifetime, even if they tried to blow it at the rate of $1m a week.

The only reason there is so much negativity about the issue is that journalists talk too much to analysts and investment bankers, and both are doing their utmost to create the impression that the issue failed. Their reason is simple. They are terrified that if others recognise the triumph Google has achieved, they will want to follow in its footsteps and that would deprive the investment bankers of one of their most lucrative lines of business.

So the bankers are doing what investment bankers do best and what we have come to expect of them - they are shamelessly pursuing their own self-interest. But there is no reason why the rest of us should be taken in by them.

Damage question

TERRY Smith of broker Collins Stewart explains that he is suing the Financial Times for around £240m because that is the amount by which his company's stock market capitalisation fell after the FT published various contested allegations about his firm. That drop in market cap is therefore the exact measure of the damage to his firm's reputation.

This raises an interesting issue. Paul Goldsmith, a consultant and academic at the Cass Business School who specialises in reputational issues, believes strongly that a price cannot be put on a company's reputation because it is based on so many subjective judgments from so many different interest groups each with a different agenda, and market cap is certainly no proxy for these things.

He points out that the Shell share price is pretty well back now to where it was before the scandal broke over its reserves figures. So the market cap measure says there is no lasting damage to Shell, whereas everyone knows its reputation is still in tatters and it will take years for the company to rehabilitate itself.