Sunday, May 9, 2004

Google stock auction - revolution or disaster?

IPO offering open to the masses, but high bids could backfire on firm

By Michael Liedtke
The Associated Press

SAN FRANCISCO - Google Inc.'s initial public offering has a lot of people salivating for a piece of the action - an appetite that the Internet search engine leader hopes to satisfy by inviting the masses to the bidding table.

While an egalitarian auction may sound like a refreshing change after years of shady brokerage dealings, the approach could backfire if Google can't meet the intense demand or the bidding pushes the IPO price so high that the shares are perched to topple once they begin trading.

For now, most IPO and technology observers are applauding Google for being bold enough to challenge the status quo with an unorthodox system that could empower individual investors.

"Google has managed to crack the code for searching online, so maybe they can crack the code for getting the individual investor more involved in the IPO market," said Kathleen Smith, an analyst for Renaissance Capital in Greenwich, Conn.

To be sure, Google's IPO isn't about altruism. The company wants to raise at least $2.7 billion.

By using a public auction, Google stands a better chance of getting the highest price possible for its stock by appealing to the millions of people who use - even revere - its search engine.

To participate in the auction, prospective bidders must open an account with one of Google's IPO bankers, Morgan Stanley or Credit Suisse First Boston.

Before the auction starts - in late summer at the earliest - Google will set an estimated price range for the IPO shares. The range is supposed to serve as a guide for investors, but the auction participants are free to submit higher or lower bids. The auction will be held through phone, fax and the Internet.

Because the auction is set up to determine the price most people are willing to pay for the stock, that theoretically means few people would buy the shares at a higher price in the first few days or weeks after they begin trading.

The scenario could cause IPO bidders to worry they overpaid for Google's stock and prompt a wave of selling that drives down the price.

An IPO auction "is something Wall Street hates to see, but no one can afford to walk away from Google," said Patrick Byrne, CEO of Inc., which used an auction in its 2002 IPO. "This could be the thing that breaks a sleazy Wall Street system."

In the dot-com boom of the '90s, investment bankers treated IPOs as a prize worthy of a favored few - major institutional investors and insiders at companies that could become lucrative customers.

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Google stock auction - revolution or disaster?