- The Washington Times - Monday, May 10, 2004

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.

Although 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 if 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.

The hype surrounding Google’s IPO, coupled with the mass appeal the company has built through its popular search engine, is piquing the interest of people who don’t normally buy stocks.

“I’m no expert, but this is something I would definitely consider,” said Brian Gottlock, a 29-year-old New York lawyer who hasn’t bought stock since he invested in Marvel Comics as a teenager. “This just seems like a really democratic idea. It feels less impersonal than when most other companies go public.”

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.

Google says it wants the auction to determine the price of its initial shares. Some will be distributed by Morgan Stanley and CSFB, but the majority are supposed to go to members of the public who bid at or above the price.

One of the biggest downsides to this system is a potential outbreak of buyer’s remorse.

Because the auction is set up to determine the price most people are willing to pay for the stock, that theoretically means that 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 that they overpaid for Google’s stock and prompt a wave of selling that drives down the price, a phenomenon known as “the winner’s curse.”

Google repeatedly advises potential investors about the curse in its prospectus. It also says that if the IPO flops, its business could suffer a black eye.

“Our brand could be tarnished, and users and investors could become frustrated with us, potentially decreasing their use of our products and services,” the company warns.

Among the handful of companies that have offered stock through the auction system, none was of Google’s pedigree. Besides its wide recognition, Google is highly profitable — earning $106 million on revenue of $982 million last year.

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

Overstock’s IPO auction rewarded its participants, although it took some time. The company’s shares rose just 45 cents during their first year of trading, but the stock recently has hovered around $39 — tripling its IPO price of $13.

Other IPO auctions haven’t worked as well. Online publisher Salon Media Group Inc. went public at $10.50 per share in 1999. The perennially unprofitable company’s shares crept as high as $15.15 during their first year on the market, but recently have traded for less than 15 cents.

An immediate price decline in a hot IPO such as Google’s would be a dramatic reversal from the frothy days of the 1990s dot-com boom.

Back then, investment bankers treated IPOs as a prize worthy of a favored few — major institutional investors and insiders at companies that could become lucrative customers.

The IPOs of that manic era almost uniformly rocketed when the shares began trading, opening a window for the privileged investors to sell their stock at a quick and healthy profit.

The pattern raised suspicions that investment bankers purposefully underpriced IPOs to assure that the initial investors would enjoy hefty gains. Securities regulators also uncovered evidence that IPO investors paid kickbacks to the investment banks, resulting in a series of fines and settlements.

The scent of scandal continues to hang over the IPO market, despite Google’s attempt to introduce some fresh air.

“I’m not planning on getting in on [Google’s IPO] because I don’t trust Wall Street,” said Farshad Foroudi, 27, of West New York, N.J. “I’m not sure how it will all work out, but I am pretty confident Wall Street will find a way to work it to its advantage.”

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