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Beware the monster IPO

/ Source: Forbes

A world without Google is, at this point, unimaginable. Such is the ubiquity of the brand and even the verb--to Google--that the frenzy of its expected initial public offering is likely to make the company worth $20 billion to $25 billion.

Google may break records for tech IPOs, though it is not likely to raise as much as nontech IPOs of companies like United Parcel Service, which raised $5.47 billion, and Conoco, now ConocoPhillips, which raised $4 billion.

The largest tech IPO is not, which raised $54 million in 1997, or Google rival Yahoo!, which raised about $32 million when it went public a year earlier. The champ in that regard may well be Corvis, a maker of optical communications systems. It raised $1.1 billion back in 2000, despite the fact that it reported no revenue, let alone earnings, at the time.

Corvis has been in the news a bit lately because it is the IPO that Dell founder Michael Dell wanted badly enough to make a case personally to Frank Quattrone. Dell's money managers assured Quattrone they would not flip the shares--that they were long-term holders.

But as with many, indeed most, monster IPOs, the flippers did well and the long-term holders were left holding the bag. Just before the offering, Corvis raised its expected price from $14 to $36 and still nearly tripled the first day. Shares sell today for less than $2.

Other big tech IPOs have suffered the same fate. Palm, which has split in two--PalmSource and PalmOne--raised more than $700 million, the excitement at the time of near-Googleian proportions. Its share price was briefly more than $1,000. It fell consistently and it trades today at just less than $20.

UPS was a monster IPO, partly because it was a longstanding, legitimately big company, but partly because it had an "Internet strategy," which many big companies were said to lack at the time it went public in late 1999. Its price quickly fell after the IPO but has since recovered.

Everyone knows that many tech IPOs have cratered since the late 1990s. But it's still awesome to consider the fate of a company like VA Linux, now VA Software. After raising $132 million in its 1999 IPO, it traded at more than $300. No matter how hyped dot-coms were, Linux was the future, the real deal. Today it trades at $2.42, less than one-tenth of the offering price.

Some strong IPOs have done well long term, of course, such as and Yahoo!, but the excitement around these were nothing like Google. Still, the only sure way to make money buying IPO shares is to flip them fast, or better yet, to sell them. According to press reports, Credit Suisse Group's Credit Suisse First Boston unit, even without Quattrone, and Goldman Sachs will lead the Google offer, taking the majority of $100 million in fees.

Perhaps that's why Goldman Sachs' own investors are among the favored few. Those who bought its IPO shares in 1999 got little pop, but they are up 33% compared to the first-day close.