How to Misprice Your IPO

In reality, it wasn't so much Google's insistence on selling its IPO through a Dutch auction that hurt the pricing, but management's refusal to play ball with Wall Street investors during the roadshow last summer. Investors were particularly turned off by the company's reluctance to offer any guidance about future earnings.

"If you want a case study on how to tick off institutional investors during a roadshow, look at Google," says Jay Ritter, a professor of finance at the University of Florida who specializes in studying IPOs. "Google's refusal to divulge any information created a situation where investors weren't willing to give the company the benefit of the doubt.''

In the absence of information, investors tend to fear the worst. That's especially the case with a company that's going public and has a short operating history, even one with a product as well-known and well-respected as Google's search engine.

The investor unease about Google's prospects didn't play out well in the Dutch auction, in which investor demand -- not the investment banks underwriting the deal -- determined the price. The irony is, if Google's top brass had been a bit more open with Wall Street, they would've gotten a lot more money.

"If they had been more forthright about their business, they might have got a higher valuation,'' says David Menlow, president of IPO Financial Network, a new stock-offering research firm. "Their egos got in the way and hurt the price.''

Still, everyone loves an IPO pop, and you can argue that Google's lead bankers, Credit Suisse First Boston(CSR) and Morgan Stanley(MWD), did Wall Street a big favor by setting the IPO price at $85, down from the $108 a share most had expected. The downward push virtually guaranteed Google a decent first-day pop and got everyone in the business press writing glowing stories.

Just imagine what would have happened if the shares had traded lower that first day. Google's stock no doubt would have recovered, but it's arguable whether the shares would have taken off the way they eventually did.

Menlow is not a big fan of the Dutch auction process and says it didn't serve Google particularly well. He says the problem with a Dutch auction is that investors don't have a good measuring stick for determining a company's value, especially when the company is playing things close to the vest.

Maybe that explains why Google has scrapped the Dutch auction idea and is going the more traditional Wall Street underwriting route in its secondary offering.

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