Google not yet a bellwether for tech sector

CIOL Bureau
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Derek Caney

NEW YORK: Google's decision to slash the price range of its initial public stock offering says more about the company's own missteps and its competitive position than about the overall outlook for technology shares, experts say.

The overall sector has already been under pressure as doubts mount over the strength in corporate spending on technology. But Google's move early Wednesday to cut its price range for its IPO stemmed more from the complexity of the share offering and anticipation of stiff competition with rivals such as Microsoft Corp. and Yahoo Inc.

"I don't look at this as a sentiment indicator of the broader market," said Barry Ritholtz, chief market strategist at the Maxim Group, which oversees $5 billion in assets. "The phrase that comes to mind with Google is that they were too clever by half. They had a convoluted share offering and tried to reinvent the IPO."

Google, the world's most popular search engine, is using an unorthodox version of a Dutch auction to sell its shares in an effort to make its shares available to a broad range of investors. Some investors have said the process has led to confusion, thus curbing interest in the stock.

"It's tempting to say that when there's weakness at a technology company, it's indicative of the sector. But in this instance, Google is an island unto itself," said Steve Tipping, vice president of portfolio management for Condor Capital Management, which manages $500 million in assets.

"The big factor here is competition. For example, Microsoft could develop its own search engine," he added. "Google's revenue is derived from Internet advertising and we've seen that bubble burst before. They're asking for a market capitalization equivalent to Ford or McDonald's, but there aren't hard assets to back it up."

Google's IPO is now slated to raise as much as $1.9 billion, far lower than its previous size of as much as $3.5 billion. Trading could begin as early as Thursday.

The company, whose unusual auction has attracted skeptics since it was announced in April, now estimates its shares will price between $85 and $95 each down from $108 to $135, amid a jittery market for technology shares and IPO's in general.

In a typical Dutch auction, the offering is launched at the highest price at which all of the shares can be sold. However Google could price the IPO lower to get a wider distribution of shares to retail investors. That in turn may crimp demand from institutions that fear that a larger-than-normal retail investor base could make the stock particularly volatile.

Alan Loewenstein, co-portfolio manager of the John Hancock Technology Fund, said, "The bids simply weren't there. It's been my view that Yahoo is a more valuable company. It's more established. They've made the capital investments to grow in different lines of businesses. Google still has to spend to increase its revenue stream."

The NASDAQ has declined 12 percent since the end of June. In that time, Hewlett-Packard Co. warned its business for servers and storage was far below expectations. Cisco Systems Inc. Chief Executive John Chambers issued cautious prospects for technology spending.

Microsoft Corp.'s targets for the current quarter disappointed investors. And Intel Corp.'s rising inventories have led to concerns of weaker profit margins.

Condor's Tipping countered that Dell Inc.'s better-than-expected results and International Business Machines Corp.'s plans to add staff bode well for tech stocks. (Additional reporting by Nick Olivari)