With shares of
soaring ever higher, the popular Internet search engine is winning praise for sticking with guns and using an unconventional auction system to sell its shares to the public.
Don't look for Google's perseverance to usher in a new era on Wall Street, however.
Over the last few days, a consensus has formed that while Google made some missteps in the days leading up to the deal, its $1.9 billion Dutch auction was in most respects a victory for the good guys. Google was able to raise a lot of money, and small investors turned a handsome profit -- all without a lot of pricey help from investment bankers.
The reality is somewhat different. While Goggle has been a hit in the aftermarket, much of that success had to do with old-fashioned Wall Street sleight-of-hand that made sure demand would be brisk after the deal priced.
In addition, the deal's success is inextricably tied to the publicity the IPO received in the run-up to its consummation. That's a quality that will be next to impossible for the vast majority of future IPO candidates to replicate.
reported last week that Google's
bankers appear to have used an allocation strategy to make sure the stock went out at $85 a share, well below the $135 sticker price the company had initially hoped for. There's evidence big investors were allocated, on average, 74.2% of the shares they had sought to purchase, a move that created excess demand for the stock and suggests it could have been priced higher if fewer bids were filled.
"This was not a true Dutch auction," says David Menlow, president of IPO Financial Network. "The deal was an unqualified success. But the bankers had to help it along."
In a Dutch auction, there rarely is a substantial post-IPO pop in a stock because the bidding process is supposed to establish a natural ceiling. The process, in theory, enables a company to get as much money as possible.
In this case, going by Monday's close of $109.40, Google left more than $200 million on the table -- a discount that resembles a lot of IPOs of the last decade.
Would it have been more or less under a more traditional IPO? Menlow says it's difficult for individual investors to determine just how much of a haircut Google took by pricing its stock at $85. That uncertainty is something Wall Street can exploit down the road.
"I can't imagine any IPO being awarded to a syndicate without some competitive valuation model," says Menlow. ''Somewhere along the line there had to be a discussion saying we think you're worth X."
That Google's deal didn't work exactly as planned is the main reason Dutch auctions are likely to remain a novelty act on Wall Street. If anything, Google's deal illustrates that like it or not, Wall Street banks still have a big role when it comes to peddling stock.
Moreover, if not for Google's name recognition, there's a good chance the deal may never have gotten done. Smaller companies have historically had much more difficulty with the auction process.
Earlier this year,
, a small online bookseller, pulled the plug on a $35 million IPO because the company was dissatisfied with the bids it got through a similar Dutch auction process.
New River Pharmaceuticals
, which priced it shares at $8 in a Dutch auction on Aug. 5, has yet to trade above its IPO price. The stock most recently traded at $7.31.
Before Google, the most successful Dutch auction was the IPO for
, which went public in May 2002. But like Google, Overstock, which priced its shares at $13, had achieved some level of brand awareness prior to that offering.
Interest in Dutch auctions has grown in recent years in the wake of the bursting of the tech-stock bubble and the myriad scandals involving IPO abuses by Wall Street banks. Fans of the Dutch auction approach say it's one way for companies to limit the power of Wall Street banks to charge excessive fees for their services and allocate IPO shares to hedge funds looking to make a quick buck by a flipping a stock.
In the Google deal, the two-dozen banks underwriting the deal, led by
Credit Suisse First Boston
, took in about half of their normal 7% fee due to a reduced workload.
As reported elsewhere, however, that discount is likely to be made up over the next months and years, as Google avails itself of Wall Street's services to sell follow-on offerings and do acquisitions.
Curiously, the fascination with Google's Dutch auction comes at a time that the process has fallen out of favor overseas.
Ann Sherman, an assistant professor of finance at the University of Notre Dame's Mendoza College of Business, says most of Europe and Asia have abandoned IPO auctions after finding they led to unpredictable pricings and disparate levels of investor participation. She says small companies tend to fair worse in a Dutch auction because it's harder for them to garner investor interest.
"One of the reasons we have the system we do is because companies want to get the attention of investors," says Sherman. "The investment banks are salesmen."