Despite anti-establishment message, Google rewards top IPO offender

Posted: Friday, May 07, 2004

NEW YORK (AP) With all the anti-establishment, 'power-to-the-people' refrains sounded in its IPO manifesto, it's curious that Google Inc. chose to reward the most notorious investment bank of the IPO boom to spearhead the initial public offering.

While Credit Suisse First Boston presumably cleansed its reputation two years ago with a $100 million settlement of federal charges, Monday's conviction of the firm's former star banker was a perfectly timed reminder of the greedy past that shadows one of Google's new Wall Street pals.

It's not that the search engine company was obligated to jeopardize its chances of a big IPO by making a bold statement with its choice of investment banks and its unorthodox choice of doling out the new shares.

As the most exciting IPO candidate in recent memory, if not history, Google was one of the precious few firms that could afford to make such a statement with minimal risk.

Despite the naive temptation to view Google's intentions as altruistic, there were plenty of old-fashioned, capitalist motives behind the decision to choose an unorthodox ''Dutch auction'' to sell $2.7 billion worth of stock.

The auction system is designed, in theory at least, to reap a far bigger payday for the company going public by protecting against the abuses that CSFB and other investment banks were accused of perpetrating as stewards of the traditional IPO process.

While a big first-day jump by a new stock is one of the most seductive aspects of getting shares before trading begins, that pop represents lost money for the business: had the price of the shares been set higher to begin with, more of the potential first-day gain would land in the company's coffers rather than the pockets of investors.

During the Internet bubble years of 1999 and 2000, new shares issued in an IPO rose an average of 65 percent above the offering price on the first day of trading, according to research by IPO experts Jay Ritter from the University of Florida and Tim Loughran from the University of Notre Dame. That compared with 7 percent in the 1980's and 15 percent from 1990 through 1998.

Those price jumps add up to a lot of money: combined, all the companies who went public in the United States between 1980 and 1998 ''left over $27 billion on the table,'' Ritter and Loughran found.

While the irrational enthusiasm that often accompanies an IPO helps explain some of that gap, it is clear now that investment banks have plenty of incentive to underprice IPOs.

In 2001, the Securities and Exchange Commission charged that CSFB had given favored clients, some in a position to help steer valuable investment banking business to CSFB, a larger number of shares from IPOs in exchange for inflated commissions on other stock trades.

The SEC said that between April 1999 and June 2000, CSFB allocated shares of IPOs to more than 100 customers who funneled between 33 percent and 65 percent of their IPO profits back to CSFB in the form of excessive brokerage commissions.

CSFB dispatched with the unpleasant accusations in early 2002 with the obligatory 'no admission of guilt' that accompanies legal settlements. But on Monday, a federal jury found that former CSFB banker Frank Quattrone was guilty of obstructing justice in that probe by sending an e-mail encouraging colleagues to destroy files.

While the Google auction will provide an exceedingly rare opportunity for individual investors to get a piece of a hot stock offering, it also promises to capture more of the IPO gains that in the past found their way into the pockets of CSFB and other investment firms.

None of these motives are necessarily a contradiction of Google's insistence that the IPO will do no ''evil'' to its granola-infused persona as corporate citizen and enlightened employer. In many ways, this IPO could help Google stay truer to its roots in addition to enriching the founders and early investors.

But it was Google's huge success that gave its founders enough leverage to force Wall Street to collaborate on an unorthodox method of selling stock that may generate only half the banking fees that would come from a traditional IPO.

Too bad the company didn't also use that leverage to prove its change-the-world rhetoric by shunning the worst offenders in corrupting the IPO business.

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