In Google IPO, the Marketplace Wins
Wall Street’s investment banking titans don’t like being told what to do. Not by federal or state regulators. Certainly not by two barely thirtysomething Silicon Valley nerds.
So it was perhaps miraculous that Google Inc.’s unorthodox initial public stock offering last week ever got off the ground -- let alone that the shares ended the week at $108.31, up 27% from the $85 offering price.
It’s early to declare winners and losers in this unusual chapter of American capital raising, but one winner does seem clear: the marketplace itself. It went its own way, defying Google’s expectations as well as those of people who wished the company ill.
Investors who are long-term bullish on technology stocks also might be able to declare a victory, of sorts. Google proved that people still can become very engaged when the topic is a major tech company’s relative investment merits. When’s the last time a non-tech company stirred these kinds of emotions?
Designed from the start to buck convention -- most important, by inviting all investors to bid for the shares, instead of allowing Wall Street bankers to parcel them out to their best (read: richest) clients -- Google’s IPO was asking for trouble.
It got it too, first in a wave of bad publicity over management missteps leading up to the sale. You don’t, for example, give an interview to Playboy magazine that could run just ahead of your IPO date. You’re supposed to be very careful about what you say publicly in the pre-IPO period, lest investors misconstrue your words, or even get them right.
But there were Google co-founders Sergey Brin and Larry Page in the latest issue of Playboy, just days before the IPO was to come to market. At the Securities and Exchange Commission, eyebrows must have been arched, and not because of Miss September.
Google’s phenomenal success since its founding in 1998 has been based in large part on its ability to think, and do, differently. That’s how it approached the Internet search function, and that’s how it says it runs its business in general. Their corporate motto, as much of the planet by now knows, is: “Don’t be evil.”
Wall Street, by contrast, is a place of tradition and convention, especially when it comes to protecting its fees for banking services, and when it comes to keeping its best (read: richest) clients happy.
By the time the Google bidding process opened Aug. 13, many of the 28 brokerages that had agreed to take orders from investors were wondering what they had gotten themselves into.
Investors large and small were confused about what price to bid. Too low a bid, and you ran the risk of getting no shares. Too high, and if others did likewise, you faced the prospect of overpaying -- because the IPO would go to all successful bidders at one price, the highest necessary to sell all the shares.
Brin and Page believed that their selling process, a so-called Dutch auction, was democratic. Bankers saw it as a challenge to their supremacy in the matters of who gets capital and at what price. The risk was that the bankers would decide that it was more in their interest to sabotage the deal than to help it.
By Wednesday it was clear that, for whatever reason, demand for the stock wasn’t developing as Google had hoped. The company had expected to fetch $108 to $135 each for its shares, and sell 25.7 million shares in all, including 11.6 million by insiders.
Instead, Google stunned the market by announcing that the stock would be sold at $85 and that the size of the offering would be cut to 19.6 million shares because insiders would sell less than half what they had planned.
The company itself, by selling 14.1 million shares, raised $1.2 billion in capital to fund its future. That was less than Google wanted, but only in America could a $1.2-billion stock sale be considered a disappointment.
By Thursday morning, when the stock was to begin trading on Nasdaq, many analysts were expecting it to tumble. Their reasoning derived in part from Google’s own warning, in the prospectus for the deal, about the risk of “winner’s curse.”
Because the auction was supposed to satisfy demand by inviting all potential buyers to bid, the fear was that there might be no one left to buy once the stock began to trade. As a result, investors who bid successfully “may conclude that they paid too much for our shares and could seek to immediately sell their shares to limit their losses should our stock price decline,” Google cautioned.
But if the company overestimated demand in the auction, it underestimated demand in the open market: The stock shot up at the opening of trading Thursday and kept going. It closed up $15.34, or 18%, at $100.34.
And it rose further on Friday, ending that session at $108.31.
It feels strange to ask “what went wrong?” with Google’s offering, given those numbers. Yet the company clearly made some faulty assumptions.
The auction process may have been easy for Brin and Page to grasp. But complex calculations are their livelihood. The company was named, after all, for a googol -- a one followed by 100 zeros.
Many average investors, the people the Google co-founders wanted to have a shot at buying the stock in the IPO, can be forgiven for having found it all too complicated. It didn’t help that the brokerages taking orders had different rules about how to bid and how many bids could be entered per account.
If they couldn’t understand the auction, individual investors knew they had an easy out: Just put in an order once the shares started to trade. And that’s exactly what many did.
In theory, if the auction had worked perfectly the stock wouldn’t have soared on its first trading day. The process is supposed to minimize the chances of that happening. Yet up it went.
In turn, that may have encouraged more of the investors who got shares in the offering to flip their stock for a fast profit.
That too was an affront to the philosophy of Brin and Page. “We would like you to invest for the long term, and you should not expect to sell Google shares for a profit shortly after [the] IPO,” the co-founders wrote in the prospectus.
But if you can’t tell investment bankers what to do, you surely can’t tell the market what to do. And that’s comforting, in its own way.
As for Google’s bankers, they can argue that the weak demand in the auction vindicated the traditional undemocratic IPO marketing model, in which the bankers work to sell the shares and decide on the price.
Still, the auction did give everyone a fair shot at the stock; the richest brokerage clients had no advantage over the first-time investor. Whether other companies might want to experiment along those lines remains to be seen, but at least Google boosted the profile of the issue.
Google also may renew investors’ interest in battered tech stocks in general. With $3 billion in annual revenue, strong profitability and exciting prospects, Google reminds people that technology still can be a tremendous growth sector.
You can’t pique that kind of interest in most other industries.
Tom Petruno can be reached at tom.petruno@latimes.com.
