Appropriately enough, check out the Google News roundup of stories about Google’s plan to auction its shares rather than hire investment bankers to allocate them to their fatcat buddies.
My understanding of how the auction works is that a pair of large brokerage houses, Morgan Stanley and Credit Suisse First Boston, will create online auctions allowing everybody who wants a slice of Google to enter a bid saying how many shares they want at a specific price. Numbers crunchers will dump all the bid data into a computer that’ll reveal an optimum price that’ll get the most shares sold at the highest price. Everybody whose bid exceeds the offering price could conceivably get the shares they bid for.
W.R. Hambrecht already does IPOs this way in a “Dutch Auction.” You’ll be hearing a lot about this in months to come, so you may as well go over to their Web site and click on “Sample auction” to get an idea of how Google’s auction might work.
This setup maximizes Google’s return on its share offering and helps ensure that the widest range of investors gets a crack at their stock at the offering price. You may as well forget the good old bubble times, when IPOs doubled or tripled in value on opening day, when thinking of Google’s IPO. Everybody who wants the stock the most desperately — in other words, the highest bidders — will own their shares before the first day of trading.
And while large investment houses may have oodles of IPO-acquired shares they want to sell to the public, they won’t want to sell them at a loss, so they’ll presumably sit on their shares for a few days or weeks, hoping that hoarding them will create an artificial shortage which will drive prices higher.
As I mentioned the other day, investment bankers used to offer a small number of shares at ridiculously low prices, counting on the forces of supply and demand (and their well-honed market-manipulating shenanigans) to drive shares sky high. If Google’s auction goes as planned, it’s harder for that to happen because supply and demand are balanced before trading even begins on the open market.
It’s not that Google won’t be a smart investment. The company’s immensely profitable and profits always drive stock prices higher. But as this story at CBS Marketwatch notes, most IPOs take years to pay off, and Google’s a one-note business: somebody else could come along and steal all their business with a better search algorithm.
It’ll be fun to watch all this unfold, in any case.
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