Google to auction shares in IPO

April 29, 2004

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.

2 Responses to Google to auction shares in IPO

  1. Phillip Blanchard on April 30, 2004 at 9:29 am

    Note that the Google IPO won’t really be open to all. “Bidders” must have accounts at Morgan Stanley and/or CSFB and be judged “qualified investors.”
    The “auction” has been portrayed as a way for the rabble to get in on something big, but it appears to be little more than a gimmick designed to attract people who might not otherwise consider such an investment (and, of course, “bid” up the share price).
    And, of course, it’s really no more of an “auction” than a Dutch treat is a treat (per National Lampoon, April 1973).

  2. tom on April 30, 2004 at 9:44 am

    I’m not at all convinced there’s any advantage for investors in participating in the auction … all the advantage rests with Google (which, frankly, is where it oughta be), and the “auction” guarantees a premium price rather than a discount.
    Seems to me you’d be just as wise to wait till the stock hits the public market, hang around for the inevitable selloff and buy then.