Design of possible Google IPO closely watched

Posted: Friday, February 20, 2004

NEW YORK (AP) It's not just when Google's much-anticipated IPO will take place that's got investors crazed. They're also clamoring to know how the deal will be done.

There is lots of talk on Wall Street that the Internet search engine won't go the traditional route of just letting investment banks divvy up their IPO's shares, which they then routinely dole out to favored clients.

Instead, Google may put some stock up for auction, allowing average investors a rare chance of getting shares.

While going that route could open the door to the masses, it has its risks.

Auctions ''sound like they have a great deal of appeal, but whether they work as well as advertised is another story,'' said Jeremy Dickens, co-head of the global capital markets practice at the law firm of Weil, Gotshal & Manges LLP.

When and even if the Google IPO will actually happen is still an unknown. There is some thought that it will go this year, possibly even sometime this spring, but the company has yet to confirm any details.

Should it happen, it would be the biggest IPO since the late 1990s, not just in terms of the amount of money it could raise which has been estimated at around $4 billion but also for its name recognition among investors.

Anyone who uses the Internet knows the Google brand, which is now synonymous with looking things up. ''Googling'' information has become so popular that its site is among the most-visited on the Web.

Who ultimately gets a piece of this IPO will hinge on how Google decides to run its offering, and whatever method it chooses will be closely watched.

That's because the IPO market has come under attack in recent years. Critics allege that investment firms improperly distribute new shares and intentionally underprice IPOs to ensure their clients are guaranteed a solid return when trading begins.

Google is rumored to be considering a more inclusive approach. While the company has reportedly hired investment banks to run a traditional offering, it also has retained a firm known for its IPO auctions.

The bankers would analyze the Google's finances and gauge prospective demand from investors largely institutions and wealthy clients to determine an appropriate offer price.

At the same time, a portion of the shares would also be sold through a method tied to the idea of a Dutch auction. Any investor, from a large mutual fund to an individual, could submit bids at whatever price they think is suitable. That demand would also be used to determine a price.

Then the bankers and the firm running the auction would come together to set the final price. The bankers still allocate their shares as they choose, while those who participated in the auction get stock if they bid at or above that final price.

Google's founders should be commended for even considering this more open route, which could include the vast audience that uses its Web search tools. But this method also could have some unintended consequences that might hurt the very people they are trying to help.

Among the risks of using an auction is that those who bid very high can corrupt the process, causing inflated and inaccurate pricing. They often bid at an elevated level just to ensure they'll get some stock, not because they feel that it represents what the company is worth.

''It doesn't make sense that you give priority to people who make the most unreasonable bids,'' said Ann Sherman, a finance professor at the University of Notre Dame who has studied IPO auctions around the world. ''And if everyone overbids, that can cause the IPO to be overpriced.''

In addition, high bidders often are quick sellers once the stock hits the market, which can create volatility in the stock and leave investors with shares worth far less than they paid at the IPO price.

Google wouldn't be the first U.S. company to try this hybrid approach, although it would be the largest offering to date. And given the significant demand for its stock even now, there is some concern that the auction could drive up the price too high.

But the other option of leaving total control in the hands of the investment banks certainly has its downsides, too.

Maybe, in the end, there isn't a perfect fix to IPOs.

Rachel Beck is the national business columnist for The Associated Press. Write to her at rbeck(at)

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