Some Investors Feel Shorted by Google
As the dust clears from Google Inc.’s market debut, some successful bidders for the stock believe that they might have gotten substantially more shares in the deal -- if the company had conducted a pure version of the auction system it championed.
As it turned out, winning bidders large and small last week complained they got only about 75% of what they were willing to buy. On the face of it, the percentage seemed to contradict the idea that initial demand for the stock was weak.
The postmortems raised more questions about the degree to which the Internet search giant helped to engineer its first-day price pop, when the stock jumped 18% on Thursday.
The shares climbed for a third straight session Monday, gaining $1.09 to $109.40 on Nasdaq.
Mountain View, Calif.-based Google won’t say exactly how it set the $85-a-share sale price or determined the number of shares to be sold, which totaled 19.6 million in Wednesday’s initial offering.
Under the so-called Dutch auction system Google used, it invited all investors to submit bids, which then were tallied by price and the number of shares sought.
Google had said its goal was to sell its stock at the highest price that would allow all the offered shares to be sold -- the “market clearing” price.
But the company all along reserved the right to price the stock under the true clearing level, which would allow more investors to be in the pool of winning bidders.
Many investors believe that’s what happened, and that one effect was to limit the number of shares they got.
“They priced it at a level that wasn’t the auction clearing price,” said Connor Browne, a portfolio manager at Thornburg Investment Management in Santa Fe, N.M. “We were frustrated about our allocation of shares,” which amounted to about 25% fewer shares than the firm hoped its winning bid would have brought it, he said.
After Google closed the bidding and set the $85 price, all investors who had bid $85 or more knew they would get at least some stock. Those who bid below that price got no stock. All winners paid the same price, $85.
Barry Randall, manager of the First American Technology stock mutual fund in Minneapolis, said he bid for 10,000 shares at $96 each, and got 7,421 at $85 -- about the same percentage order “fill” rate as Browne’s firm.
Patrick Lister, a small investor from Corona, bid $105 each for 50 shares and $95 each for 55 shares, and received 78 in all, also a 74% order fill rate.
There’s no way to know how many orders were filled at that ratio, but a common complaint from big investors was that they got about three-quarters of what they wanted.
Some investors said the shortfall initially surprised them because Google had announced early Wednesday that it was slashing the total number of shares offered by the company and by insiders from 25.7 million to 19.6 million -- a sign of weaker-than-expected demand.
Google at that point also cut the estimated price range for the stock to $85 to $95, from its previous range of $108 to $135. Later that day, it priced the stock at $85, the low end of the estimated range and another apparent indication of dismal demand.
Yet when trading opened on Thursday the stock immediately soared, and ended the session at $100.34, for an 18% first-day gain.
Many analysts and investors believe that Google and its investment bankers had two goals in setting the $85 price and in deciding on investors’ share allocations. First, the company wanted to be sure it awarded stock to important big investors that had cut their bids to around $85. And second, Google wanted to boost the odds that the price would surge when trading began, to create a buzz for the stock.
Jay Ritter, a University of Florida finance professor who is an expert on new stock offerings, said that by lowering its expected price range to $85 to $95, Google probably triggered a last-minute rush by institutional bidders to the $85 level.
Even if demand still was good enough to allow a true market-clearing price of, say, $87, at that level Google would have excluded all of the institutions that had bid $85, Ritter said. That might have alienated some key potential future buyers of the stock, he said.
What was the actual clearing price? A Google spokeswoman declined to comment, citing the mandatory post-sale “quiet period” the company must observe under federal rules. In any case, Google has said it wouldn’t disclose bidding information.
If Google had followed the rules of a pure Dutch auction, it would have been obligated to go with the clearing price -- and in theory, it would have satisfied all demand for its shares, so that there was less chance of a first-day price pop. The company originally had said that that was one of its goals.
But in its final moments, the Google stock sale closely tracked how Wall Street has traditionally parceled out new shares, said Thomas J. Murphy, a securities lawyer at McDermott Will & Emery in Chicago.
“It was, ‘Who do we want in, and who do we want out’ ” of the deal, he said.
