CurrentOfferings.com Story:

Google Blazes Lonely IPO Trail By Joanna Glasner

Joanna Glasner, Wired, November 9, 2004

While Google remains a trendsetter in the online search business, the company has had less influence spurring others to follow its offbeat approach to an initial stock offering.

Three months after Google's closely watched initial public offering, the pipeline of internet and technology firms poised to launch their stock market debuts is refreshingly full. But so far, all prospective IPO candidates are opting for the traditional method of selling shares directly through investment bank underwriters, rather than with the auction method favored by Google (GOOG).

While it's hard to cast Google's IPO as a flop -- it did, after all, raise $1.65 billion in cash for the company -- observers say the offering didn't go as smoothly as company insiders had hoped. The offering also didn't fetch the stock price that Google sought when it first laid out a prospective share price range in its IPO filing.

"One of the ironies is that what makes Google so great is its simplicity, and the IPO really wasn't simple," said Tom Taulli, author of Investing in IPOs and co-manager of the Oceanus Value Fund.

Google surprised Wall Street in the spring when it announced it would run its IPO using a method called a Dutch auction, in which any investor can bid for shares before trading begins. In most IPOs, share prices are set by investment bank underwriters and their clients who agree to take part in the offering.

In the months following its unorthodox, auction-style IPO, Google's stock market performance has done much to disprove fears of experts and even its own warnings about investing risks.

Initially, market pundits worried that the attention fixated on the Google offering, combined with its stature as a household name, would create a recipe for instant overvaluation.

Even Google advised would-be shareholders to proceed cautiously. In its IPO prospectus, the company warned about the possibility of a "winner's curse" in which successful bidders could quickly see a significant decline in the value of their investment.

None of those fears came to pass. In fact, the reverse occurred. Google received fewer high-priced bids for stock than anticipated, and winning bidders got shares for $85 each. Over the course of the next three months, the stock surged as high as $201, before settling down to around $174 on Monday.

Scores of investors who ignored the skeptics and successfully bid on Google shares pocketed the kind of quick profit reminiscent of the dot-com boom. Market watchers who chose to sit out the IPO, meanwhile, have been forced to re-examine preconceived notions about how an auction-style offering is supposed to work.

"In theory, the Dutch auction is supposed to efficiently price the deal, and it's supposed to fall after the IPO. But this was different," Taulli said. When Google launched its IPO, Taulli advised investors to sit out the auction and buy shares later on the Nasdaq exchange. But even on its first day of trading, Google didn't dip as he'd expected, instead tacking on another $15 to its share price.

While Google's offering was not without glitches, at WR Hambrecht & Co., the firm that orchestrated the Dutch auction, the search company's experience is inspiring others to consider following in its footsteps.

"We absolutely have seen a rise in inquires, I think because people realize the auction is a better system," said Sharon Smith, a spokeswoman for WR Hambecht.

Currently, no auction IPOs are in the pipeline. Smith declined to disclose names of companies that expressed interest.

Prior to Google, the last U.S. company to complete a Dutch auction IPO was New River Pharmaceuticals (NRPH), which has seen its share price nearly double since going public in August. Before that, a handful of mostly small and midsize companies, including Peet's Coffee (PEET), Salon (SALN) and Overstock.com (OSTK), sold shares by auction.

The vast majority of firms opt for bookbuilding, the traditional form of share allocation in which investment bank underwriters secure buyers for IPO stock.

Critics of bookbuilding say the process allows investment banks to underprice shares so that those who hold pre-IPO stock -- often their favored clients -- can profit handsomely when the stock surges in first-day trading. The company going public, meanwhile, loses out by selling stock to pre-IPO investors at below-market prices.

The beauty of an auction, say fans of the process, is that a new issue gets priced exactly as it should, because all interested investors are permitted to make a bid.

But Taulli believes factors at play in the Google offering created an unusual outcome. First off, the auction process was unusual and complex. Rather than just put in an order with a broker, investors had to register for a bidder-identification number and could only participate in the auction with certain brokers. Many of those brokers required investors to have significant assets in order to participate, Taulli said.

Google stock's heady gains in late October also have much to do with its first earnings report, in which the company posted better-than-expected revenue gains.

But even some fans of Google's search business believe the company's stock price was too high even back when it first began trading.

"I thought that $85 was too high then, so I think that $165, or whatever it's trading at now, is really too excessive," said Jason Draho, author of The IPO Decision: Why and How Companies Go Public.