Investors Eagerly Anticipate
Google's Public Offering
Dutch Auction-Type Process
May Give Smaller Bidders
A More Level Playing Field
By RUTH SIMON and ELIZABETH WEINSTEIN
Staff Reporters of THE WALL STREET JOURNAL
April 30, 2004; Page C1
One of Google's search options is entitled "I'm Feeling Lucky." The same
sentiment will be needed for individual investors seeking to get a piece of Google
Inc.'s hot IPO.
In a sharp break with tradition, Google will offer shares through a process
modeled after a Dutch auction. "We are in a new world," says Richard Peterson,
chief market strategist for Thomson Financial. "This will be the true test of how
the Dutch auction works."
In traditional IPOs, underwriters help fix the number of shares a company will sell
and set the offering price, with favored clients often reaping the benefits of a big
first-day run-up in the stock price.
The Google auction is designed to put investors on a more equal footing by
letting them, rather than investment bankers, help set the price for shares via
bidding. But there are big risks: The auction might encourage investors to bid up
the offering price so high that the shares actually sink rather than soar once they
begin trading. Moreover, many IPOs have been poor performers over the long
run.
Many details of the Google offering have yet to be determined, but here's what
the company said about how the auction will work:
To start the process, Google will set a price range for its shares. In order to bid,
potential investors must open an account with one of the underwriters. Morgan
Stanley and Credit Suisse Group's Credit Suisse First Boston were listed in the
registration statement Google filed with the Securities and Exchange
Commission yesterday, but other firms will also distribute shares.
HOW TO BID FOR A PIECE . . .
Qualify to participate in the IPO: Contact
one of the underwriters to see if you meet
eligibility requirements, open a brokerage
account and get a bidder ID.
Submit your bid: Provide the number of
shares you want and pick a price. It can be
within the range Google suggests or a
higher one if you think demand will be
stronger than expected or a lower one if you
think demand will be weaker.
Hope that you get a piece: Google will
calculate the highest price that sell all
shares, then choose a final price that may
be lower if it wants to give the stock price
room to grow immediately.
If you bid at or above the offering price,
you get Google shares: You probably
won't get all you requested, because it's
likely that successful bidders will request
more than 100% of the available shares.
Investors who meet the brokerage firms'
eligibility and suitability requirements -- and
accept a copy of Google's prospectus
electronically -- will receive a bidder ID.
Later, investors will be able to bid by phone,
fax or over the Internet, providing the
number of shares they would like to
purchase and the price they are willing to
pay. Many investors are likely to make bids
within Google's price range. But they can bid
above or below the range, speculating that
demand for the shares will be stronger or
weaker than Google expects.
Google and its underwriters will compile the bids and then calculate the highest
bid, or clearing price, that will allow the company to sell all the available shares.
Google can choose to offer shares at that price or select a lower price that makes
it more likely that the shares will increase in value when they begin trading.
Google hopes the process will deter short-term speculation by setting a price that
will meet demand. "Buyers hoping to capture profits after our ... stock begins
trading may be disappointed," the company says in the filing. The company adds
it "will reject bids that we believe are speculative or manipulative."
Given the huge interest in Google, it is likely that demand will outstrip the supply
of shares. In its filing, Google says it reserves the right to increase the size of the
offering in response to strong demand. It also spells out options for dividing
shares among bidders. One is to prorate distribution so that all bidders receive
the same proportion of shares. Another, called maximum share allocation, would
give investors with the smallest bids the entire amount they requested. Investors
who place larger bids, on the other hand, might get a smaller proportion of their
request.
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Notre Dame.
Google didn't indicate when the
auction process would begin or
how long it would take.
First-day gains for initial public
offerings were particularly striking
during the Internet bubble, when
the average stock climbed 65%
the day it went public, according
to professors Jay Ritter of the
University of Florida and Tim
Loughran of the University of
But over the long run, most IPOs have been mediocre investments. Companies
that went public between 1970 and 2002 returned just 9.2% annually in the five
years after their initial offering, 4.2 percentage points less than stocks of similar
size, according to Professors Ritter and Loughran. "The poor performance tends
to come in the second year," says Prof. Loughran, when the companies fail to
meet investor expectations. (Prof. Ritter declined to comment because he has
advised Google.)
The Dutch auction system -- modeled after a technique for selling flowers in the
Netherlands -- could result in a broader distribution of shares and smaller firstday gains. "It reverses the usual practice that has been roundly condemned ...
where favored people get favored allocations," says John Markese, president of
the American Association of Individual Investors.
But there are risks. With an auction, there is a temptation to "just bid very high,"
says Tom Taulli, an IPO analyst with Current Offerings. "It could drive the stock
price to levels that are unsustainable and inflated."
Indeed, in its registration statement, Google cites the possibility that the offering
price will be so high that demand for shares could be limited, causing the price to
drop. Moreover, it says, winners of the auction may then conclude that they
overpaid and sell to limit their losses, further driving down the price. That
phenomenon is known as "winner's curse."
Google says in the filing that its goal is to "achieve a relatively stable price in the
days following the IPO."
There are signs that demand for Google shares will be unusually strong,
however. Interest in Google's registration statement was so high that it almost
overloaded the SEC's Edgar Web site. The agency had to double its normal
capacity to handle the deluge of people trying to access the site and view the
filing, SEC officials said. It was the most traffic the SEC's site has ever had to
handle, the officials said.
Jim Kelley, director of development for athletics at the University of North Florida,
is among the investors looking to get in on the ground floor. "I thought I might buy
$30,000 worth," says Mr. Kelley, who normally makes about two or three stock
trades a year. "I don't care what the offering price is on the first day. It will shoot
up," he added, before reviewing the filing. "It's one of the rare things ... you know
almost 100% it's a sure thing."
Even some investors who have been burned by past IPOs are willing to give
Google a look. Richard Couture, a retired furniture and appliance store owner in
Freeport, Maine, keeps confirmation statements from the purchase and sale of
Yahoo Inc. shares framed above his desk to remind him of the nearly $2,800 he
lost buying the stock the day it came public. But Mr. Couture is taking a close
look at the Google IPO. "It's definitely going to be hot," he says.
The auction system is still relatively untested in the U.S. Fewer than a dozen
companies have used this format to go public in recent years. WR Hambrecht &
Co., a San Francisco investment bank, has helped nine companies go public this
way. One WR Hambrecht offering, Andover.net, gained 331% on its first day of
trading in December 1999. Most of the others have had small, if any, run-ups in
their first day of trading.
Outside the U.S., where auctions have been more common, the process tends to
generate smaller first-day gains than traditional IPOs. In France, where
companies have used both methods, "the first day returns were in the order of
12% as opposed to 20%" with traditional IPOs, says Kent Womack, an associate
professor at the Tuck School of Business at Dartmouth. The lesson for investors:
"don't rush into these things expecting you are going to get some 100% gift the
first day," says Prof. Womack.
Ironically, Google's decision to embark on an auction comes at a time when the
use of this approach is fading. "Around the world, auctions have fallen out of
favor," says Alexander Ljungqvist, a finance professor at New York University's
Stern School of Business.
Write to Ruth Simon at ruth.simon@wsj.com and Elizabeth Weinstein at
elizabeth.weinstein@wsj.com