Google IPO plan could leave bankers moaning

Dutch auctions…would let all investors — regardless of size — bid for Google's shares directly, rather than have an investment bank determine the price of shares and who should receive them. As the trial of investment banker Frank Quattrone shows, many hot IPOs during the dot-com boom went into hands of family, friends and high-value clients.

National Post
October 25, 2003

Google IPO plan could leave bankers moaning
Online auction would benefit small investors
Mark Evans

Google Inc.'s apparent interest in using an online auction to sell its much-coveted initial public offering could have a major impact on the investment banking industry.

If Google, which is interviewing investment bankers, decides to go down the auction path, it could slash the IPO fees charged by investment firms and level the playing field by giving smaller investors a shot at popular deals. It would also legitimize the Dutch auction process, which has seen little momentum since it was launched in 1999.

"[Dutch auctions] are more transparent, more open and I think this could be a magic moment for Dutch auctions," said Bill Doyle, a research director at Forrester Research Inc. "If Google went that way, it could really signal a sea change."

Google's interest in a Dutch auction makes sense on several fronts, given that it is the preeminent Internet property with more than 56 million unique users last month. If any dot-com has the brand and the investor clout to offer a Dutch auction, it's Google.

Dutch auctions work by giving potential investors a way to set the price of an IPO by placing bids on the Internet for the number of shares they want at the price they want to pay. When the bidding ends, the underwriter adds up the bids and re-offers the shares to bidders at the highest price that will let it sell the entire block.

This type of offering would let all investors — regardless of size — bid for Google's shares directly, rather than have an investment bank determine the price of shares and who should receive them. As the trial of investment banker Frank Quattrone shows, many hot IPOs during the dot-com boom went into hands of family, friends and high-value clients.

For companies going public, Dutch auctions offer lower underwriting commission fees, and there is less money left on the table if an offering takes off after it starts trading. EBay Inc., for example, raised US$63-million at US$18 a share in 1998 but started trading at US$53.50. This was great for IPO investors but it meant that eBay could have raised an additional US$124.3-million by pricing its offering higher to meet the tremendous demand.

Mr. Doyle said there is an opportunity for Dutch auctions to become part of the IPO landscape because new securities rules in the United States have separated the activities of an investment firm's banking and research arms. This means that an investment bank cannot offer a potential IPO client the guarantee of analyst coverage, which was coveted by fast-growing companies.

"Now, those investment banks are prevented from any overt connection," he said. "They can't link overt research coverage to investment banking business. If you can't guarantee me that, what have you got?"

The Dutch auction system was pioneered by Bill Hambrecht, who runs W.R. Hambrecht & Co. Using a Web-based format called OpenIPO, he took several firms public, including Ravenswood Winery and Peet's Coffee.

However, the decline of capital markets saw IPOs disappear, and only eight companies went public through an OpenIPO. But with the markets coming back to life, San Francisco-based RedEnvelope Inc. recently used this route to go public.

Google's interest in using a Dutch auction may be scuttled by major investments firms such as Goldman Sachs that would be willing to slash their commission fees — traditionally pegged at about 7% — to win the much-coveted IPO.

"All investment bankers are very hungry right now and desperate for this deal," Mr. Doyle said. "The investment banks are fighting to be the outfit that gets it. They will make the argument internally that this is going to be talked about for the next 10 years. This will be the equivalent of the Netscape IPO. Frank Quattrone was known for doing Netscape, they want to be known for doing Google."

There has been speculation that Google could be worth US$15-billion to US$25-billion. This would give the company a market capitalization to revenue ratio of 19 to 31 times. This compares with Yahoo Inc. and eBay Inc., which sport ratios of 25 and 30, respectively.

While Google declined to comment on the IPO speculation yesterday, it did announce the acquisition of Sprinks.com, an online advertising service, for an undisclosed amount.

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