Updated from Aug. 18
Growing criticism over
Dutch auction played into the hands of Wall Street banks, which receive fat profits from underwriting traditional IPOs.
Internet search engine Google slashed its offering price to between $85 and $95 a share Wednesday, from an original estimate of between $108 and $135 a share. The company also reduced the number of shares to be sold to 19.6 million from 27.5 million, sparking criticism over the way the deal has been handled.
True, the stock managed a
double-digit pop in Thursday's after-market, moving quickly above $100 and lining the pockets of bidders whose orders were filled at the $85 clearing price, at least on paper. But the deal went out roughly $13 billion below the high end of its originally registered forecast, crimping its founders' fortunes and leaving unanswered the question of whether a traditional underwriting would have been more lucrative.
"A lot of large brokerage houses are smiling because it's in their interest to have these types of offerings not go perfectly," said Scott Kessler, an equity analyst at Standard & Poor's.
Credit Suisse First Boston
and others will garner fees for helping to manage Google's auction, those fees "aren't close" to what these institutions would have received for a typical IPO, according to Kessler.
"Investment banking largely benefits from the traditional IPO process," he said. "The brokerage industry would just as soon go back to the way things used to be."
In Google's final prospectus, the company said the deal's two lead underwriters received a roughly 2.8% fee on the deal. The standard is closer to 7%.
While there's little doubt that market conditions were a big factor behind the reduction in Google's offering price Wednesday and the company's founders slipped up in granting an interview to
magazine right before launching the IPO, the controversial auction also has complicated efforts to sell the deal to investors, say some analysts.
In a Dutch auction, participating bidders set the price of the IPO rather than a large Wall Street institution. For individual investors, who were largely shut out of the highflying IPOs of the late 1990s, the system seemed decidedly egalitarian.
In practice, however, "some investors were more equal than others," according to John Fitzgibbon, an IPO analyst at 123 Jump.com.
"A potential bidder had to be an 'accredited investor,'" he wrote on the company's Web site. "That meant the average man or woman on the street would not be qualified to bid on Google's IPO, unless his or her individual financial status was pretty darn sound."
In general, many underwriters require an IPO client to have an account balance above a certain figure, and the client must have annual income over a certain amount, he continued.
"These requirements add up to something pretty simple: If you don't have the dough required by the big boys on Wall Street and some of their smaller cousins, you don't have a prayer of getting in on any IPO," he said.
Kessler agreed that bidding for shares of Google has been "very challenging" for individual investors. "Some underwriters have made it very easy and others have not," he said. "Each underwriter has been given flexibility in deploying the specifics of the process."
Still, Kessler noted that the system has been far more democratic than an ordinary IPO would have been. "It's infinitely more
egalitarian than pretty much every IPO that's been done over the past couple of years," he said.
While Google is the biggest U.S. company to auction its shares to the public, it's certainly not the first.
Salon Media Group
Peet's Coffee and Tea
all went public by auctioning off shares, with varying degrees of success.
In a typical IPO, the Wall Street bank effectively purchases all the shares from the company and sells them at a 15% to 20% discount to "get the deal out the door," according to Fitzgibbon. That's why many IPOs see a bounce on the first day of trade.
Because the Dutch auction process is intended to value the shares appropriately, aftermarket bounces can prove elusive.
Nevertheless, Kessler said this method of sale could become more commonplace in the next few years. "It's my sense that this really is the future," he said. "You're going to see increasing reliance on auction elements. The technology is available to do it, and frankly, it makes sense."