Stock’s 1st-Day Pop Fuels Debate Over IPO Auction
They didn’t like it at $85, but they loved it at $100.
That was one conclusion that could be drawn from investors’ warm reception for shares of Google Inc. on Thursday, as the stock began trading on Nasdaq.
Under the unconventional auction process the company used to go public, potential buyers had the chance to name the price they were willing to pay.
But many investors were unwilling to take part in the auction. Facing a relative shortage of bids, and apparent low-balling by some bidders, Google late Wednesday set an initial offering price of $85 -- far below the range of $108 to $135 the company had thought it might fetch.
On Thursday, investors who could have gotten the stock at $85 in the auction, but stayed away, were suddenly willing to pay as much as $104.06 a share for Google on its first trading day. That was the session high.
“A lot of retail and institutional investors took a pass on the auction, and decided to wait and see,” said Scott Kessler, Internet analyst at Standard & Poor’s in New York. “Maybe their wait period was a lot shorter than they thought it would be.”
Demand was clearly robust: The stock opened at $100.01, never fell below $95.95, and ended the day up $15.34 at $100.34.
The offering, which had faced a number of hurdles, had to deal with one more: The Nasdaq market said an unidentified brokerage entered a few trades before the official opening, at prices as high as $140.92. The trades were mistakes and weren’t executed.
By the end of the day more than 22.3 million shares had traded, exceeding the 19.6 million the company and key insiders sold in the offering. That means some shares changed hands many times during the day.
The reception, although obviously a boon for the successful auction bidders and for Google insiders, didn’t end the debate over whether the auction method of selling new stocks was better than the traditional method, whereby investment bankers set the price of an offering after consulting with the company and interested big investors.
Indeed, some Wall Street pros said the stock’s first-day pop was exactly what shouldn’t have happened if the auction system worked perfectly.
In theory, with investors collectively determining the offering price via their bids, that should have been the “market clearing” level. Demand should have been satisfied at $85.
With the stock ending the day just above $100, one natural question was whether investment bankers might have been able to get Google that price in the initial offering, boosting the capital raised for the company and the insiders selling shares.
Barry Randall, who manages the First American Technology stock fund in Minneapolis, said he bid $96 a share for Google. All bidders at $85 and above wound up getting at least some stock, and all paid the $85 price.
“I think a traditional offering probably would have resulted in a higher price,” he said.
Some investors’ view of the auction process, he said, was that “I’m not going to be a part of this social experiment.”
But other analysts said there was no way to know whether investment bankers, left to their own devices, would have priced Google lower or higher than $85.
Historically, bankers have sought to price new stocks low enough to guarantee a first-trading-day jump -- a reward for the investors who were willing to take the risk of buying. One of the reasons Google’s management chose the auction process was to avoid that outcome.
Given the stock’s surge Thursday, some analysts wondered whether Google relied on its bankers’ advice in setting the share price, after all. In the prospectus for the offering, Google said that it reserved the right to use its own discretion in setting the final price.
“So even though they used the auction process, they still decided on a price,” said Steven Thel, a securities expert at Fordham University in New York.
To be sure, the stock’s 18% jump was a far cry from the huge leaps common in the dot-com boom of the late 1990s, and some analysts said it was not a big enough move to discredit the auction process.
Exactly how Google chose the price may never be made public because it isn’t required to disclose that information.
The other big question many analysts were asking Thursday was, were the buyers on the first trading day largely institutional investors or individuals?
The heavy volume of trading indicated that big institutions must have been in the market, and were willing to pay up for Google. Foreign investors who didn’t qualify for the bidding process also may have been buying, Kessler said.
But Tom Taulli, co-founder of CurrentOfferings.com, a stock research service, said watching the trading action on a computer screen “made you dizzy” because of the large number of 100- and 200-share blocks changing hands -- a sign of small investors’ trading.
Taulli noted that, in seeking to democratize the stock-sale process by using an “everyone’s invited” auction, one of Google’s goals was to make sure that small investors didn’t have to overpay once trading began -- their usual fate.
If Google shares rise in coming months, or at least hold level, the investors who clamored to buy at $100 may still believe that they got a good deal.
But if the stock slumps, the retail buyers may find that, despite Google’s intentions, “as usual they ended up getting the stock at the high,” Taulli said.
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Tech giants, by the numbers
Here’s how Google compares with other technology and Internet giants, in terms of stock-price-to-earnings ratios and market value (stock price times number of shares outstanding).
Thurs. P/E stock on est. Market value Company close 2004 EPS (billions)
Microsoft $27.12 22* $292.8 IBM 84.89 17 142.2 Intel 22.01 18 141.2 Cisco Systems 19.10 22** 129.1 Time Warner 16.50 26 75.4 EBay 79.68 67 52.7 Yahoo 28.11 84 38.2 Google 100.34 82 27.2 Amazon.com 38.63 39 15.7
* for fiscal year ending June 2005 ** for fiscal year ending July 2005 Sources: Bloomberg News, Thomson First Call, Standard & Poor’s
