CurrentOfferings.com Story:

Google's Egalitarian IPO Plans May Not Satisfy Small Investors

By Elizabeth Weinstein, Wall Street Journal, April 27, 2004

Is Google going Dutch?

Wall Street is rife with speculation that the Internet-search firm could use an online sale known as a Dutch auction to sell its highly coveted shares once it announces its likely initial public offering this week. In a deal that could potentially value the Mountain View, Calif. company at as much as $25 billion, an online sale could make room for smaller investors to get a chunk of the hot firm and might also be a step toward redefining the way U.S. companies go public.

Google continues to keep the specifics of its plans a secret. While there is widespread speculation on Wall Street that Google will insist that at least part of the deal is sold directly to the public, it's uncertain exactly what form that sale would take if Google decides to go that route; it may opt for a traditional IPO.

The Dutch auction system -- modeled after a technique for selling flowers in the Netherlands -- is still fairly novel in the U.S., with less than a dozen companies using the format to go public in recent years. Market watchers say WR Hambrecht + Co., a San Francisco investment bank, is the only U.S. company advocating the auction format online, through its patented OpenIPO process, and the company Google would likely tap to lead an auction of its shares. So far, WR Hambrecht has helped nine companies go public this way. Google declined to comment on any aspect of a potential public offering.

With so much potential traffic, some speculate that the auction could tax computer servers. But glitches haven't been a problem in the past, according to a spokeswoman for WR Hambrecht who says its OpenIPO auctions "have never had technical issues" and that the company has built-in safeguards against problems. She declined to comment on a Google offering.

In a Dutch auction, the number of shares is fixed, but their final price is determined by anyone "with a dollar and a dream" says John Fitzgibbon, an IPO analyst with Red Herring.com. The process helps even out the playing field by lessening the influence of the investment banks and their favored clients, and sets a fairer market price, its advocates say.

Here's how Google's auction could work using WR Hambrecht's OpenIPO model: Google would determine how many shares it wants to issue and set a price range for its shares -- say 100 million shares at $10 to $15 per share. The IPO would be open to bidding on the Internet with buyers entering the number of shares they want and the price they're willing to pay. Most people would make bids in Google's range, but some would bid above and some below the range, speculating on stronger or weaker demand for shares than Google estimates. A computer sorts the bids by price and ranks them from highest to lowest, calculating the highest bid price that will sell all available shares.

Google would then decide at what price it will offer shares. It could sell at the maximum offering price or it could apply a discount offering shares for less than the maximum. If Google set the offering price at $13, anyone at or above that price would be guaranteed a percentage of shares. Those who bid below $13 are shut out, a result that could leave a bad taste with investors who have been salivating over the hot IPO.

If individual investors lose out on the IPO -- as they might when bidding for goods on online-auction site eBay -- they could feel the system was undemocratic. "They'll feel like the system is rigged, that there's something wrong ... and the system is only meant for the big boys," says Tom Taulli, an IPO analyst at Current Offerings, a Newport Beach, Calif.-based IPO research firm.

Further, online auctions are conducted over a period of several days or weeks. "IPOs happen over a period of time, so if there's a glitch in the system � they'll have enough time to work it out," Mr. Taulli says.

Overstock.com, a Salt Lake City-based online discount retailer, sold all of its three million shares in 2002 using WR Hambrecht's OpenIPO process. The auction went flawlessly and attracted better quality investors, says Overstock.com President Patrick Byrne.

"It's far fairer for investors and for the company," Mr. Byrne says. "The stock ends up in the hands of the right people the first day."

In traditional IPOs, investment-bank underwriters help fix the number of shares a company will issue and set their price. Historically the investment banks' institutional clients have benefited more from the system, reaping more shares at discounted prices than average individual investors, who can get lost in the shuffle.

The auction process tends to push shares toward their true market value, resulting in a share price that probably won't rise or fall dramatically in the first few days of trading as with some traditional IPOs. Further, letting the average Joe make bids without a broker to give a deal muscle on the back end can also keep share prices down after an IPO's opening day.

"You're not going to see any after-market kick in the stock because all the people who are willing to pay up for the stock have already done so," Mr. Fitzgibbon of Red Herring explains.

IPO watchers say Google would likely blend a traditional IPO with an online auction, using its chosen investment-bank brokers Credit Suisse First Boston and Morgan Stanley to set up and manage the deal, then tapping WR Hambrecht to sell part of its shares online. CSFB declined to comment. Morgan Stanley didn't return calls seeking comment.

Google wouldn't be the first to use the blended approach. In 2001, WR Hambrecht co-managed a blended auction of Instinet Group Inc.'s IPO with Credit Suisse First Boston, selling 5.6 million shares, or about 17.5% of the company's 32 million shares, in a Dutch Auction on the Internet. The online auction generated so much demand that the IPO priced at $14.50 per share, from an initial price range of $11.50 to $13.50. (The price was the same for auction participants as it was for those buying through the more traditional channels.)

In the long run, if Google bucks tradition and goes online to sell some or all of its shares, it could raise the profile and popularity of online IPOs and inspire smaller firms to follow Google's high-profile lead.

"This isn't crazy thinking by a couple of 30-something founders at Google," Mr. Taulli says. "This is big in the IPO world because it could lead to other offerings on a major scale using the Dutch auction."