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Extra
Can you get in on Googles IPO?
The mighty and the rich have the best shot at this widely anticipated public offering -- unless the company decides on a more democratic (and lucrative) auction-style sale.
By Kim Khan
The prospect of a money-making Internet company going public has investors wondering how they can get a piece of what could be a huge initial offering for shares of Google. Unfortunately, unless the company chooses an unconventional public "Dutch auction" of shares, it wont be easy.
Its a fact of life in the traditional new-issues market that individual investors are the first to be shut out. Investment banks take care of their large institutional clients first, and with hot IPOs, the demand is usually such that theres little left over for individual clients.
Anyone can submit a request for shares before the stock goes public, says David Menlow, president of IPOFinancial.com, but when theres ostensibly unlimited demand with a limited supply, theres going to be abuse.
Individuals are going to hear I couldnt get you any shares, from their broker, when what the broker really means is I didnt want to give you any shares, Menlow said. Investors who are looking to buy large blocks of shares and who can introduce their broker to 15 other high net-worth individuals are much more likely to receive a Google allocation than others. Its very much quid pro quo, he said.
High demand, limited supply
Of course, once the shares go public, anyone can buy them on the open market. But the best way to be positioned to acquire IPO shares before the first trade is to have an account with the underwriters.
Google has tapped Credit Suisse First Boston and Morgan Stanley as lead underwriters, The Wall Street Journal reported today. But unless you are a very good client, chances are you wont be offered a slice of the Google empire. There are possibilities that the rest of the underwriting team may be more friendly to individual investors, but again the problem is high demand and limited supply.
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Underwriting firms that have a high percentage of individual investors as clients are more likely to allocate portions of IPO shares to individuals, the Securities and Exchange Commission says on its Web site. Several online brokers offer IPOs, but these firms often have only a small allotment of shares to sell to the public. As a result, individual investors' ability to buy these shares may be limited no matter which firm they do business with.
But theres no reason to despair just yet. Google may want to reward the little guy. Management has pushed for an online sale of shares to individual investors that could make it possible for anybody to own a piece of the company before the debut, the Journal reported. It also could split the offering, Menlow said, selling Class A shares to the general public and Class B shares with 10 votes per share to the company insiders.
Will Google go Dutch?
The search engine company could decide to set aside a percentage of its shares and run what is know as a Dutch auction. W.R. Hambrecht has led IPOs using this system, known as OpenIPO, for companies such as Peets Coffee (PEET, news, msgs) and Overstock.com (OSTK, news, msgs).
In the system investors submit their bids -- how many shares they want and how much they are willing to pay -- online. Individual investors are given the same consideration as institutional investors. The offering price is then determined and those bidding at or above the offering price receive shares, sometimes prorated if the total number of shares requested is bigger than the number of shares being sold.
That would put things on a level playing field, but could prove disastrous for the stock valuation, Menlow said. Traditional IPOs price low and then let the market decide what premium to assign to a stock. A Dutch auction IPO could end up pricing Google shares at a huge valuation.
I was never a critic of the underwriting community when they used to bring a stock like Sycamore Networks (SCMR, news, msgs) at $38 (per share) and it opened at $270 per share, Menlow said. It was the idiots that were buying it at $200 that were the problem. Underwriters have a fiduciary responsibility to price the stock according to a financial model, he said, and a Dutch auction of Google would almost certainly see a lot of the speculation and hype priced into the stock.
Google would be better served by a traditional pricing mechanism, based on a financial model that makes sense, he said.
Who will get rich from Google?
While the small investor may be left out of the Google windfall, some celebrities look set to pad their wallets even more. Because of their involvement in a celebrity mover-and-shaker venture capital fund, Tiger Woods, Henry Kissinger and Arnold Schwarzenegger all stand to benefit, CNBCs Corey Johnson reported.
Woods, Kissinger and Schwarzenegger put money into Google in 1999 through Angel Investors. Venture capital firms Kleiner Perkins Caufield & Byers and Sequoia Capital also invested in Google that year.
Google co-founders Sergey Brin and Larry Page will naturally see their net worth jump a few levels, but it is still unknown how much of the company they still own and how much they sold to investors along the way, Johnson reported.
Details coming slowly, but surely
Google has played its IPO cards very close to its chest, and there are still a lot of uncertainties about the company and the offering. Its not certain what its finances are like, but Google is reported to have had profits of $150 million on $900 million in revenue in 2003.
There also are reports that Google will file documents with the SEC as soon as Thursday, perhaps with details on the offering plans or with more transparent financial information than previously available.
Google could raise $2 billion in its IPO, according to varying reports, with the company being valued at about $25 billion. That would make it one of the largest debuts in history. It also would give the company a larger market capitalization than a number of high-profile S&P 500 companies, including FedEx (FDX, news, msgs) and Lockheed Martin (LMT, news, msgs).
Check out a screen of S&P 500 companies with a market capitalization close to $25 billion.
The IPO could be one for the history books, possibly one of the largest ever in terms of market capitalization.
| 10 biggest U.S. IPOs | | | Company | Date | Underwriter | Industry | Size* | | 1 | AT&T Wireless (AWE, news, msgs) | 4/26/2000 | Goldman Sachs | Telecommunications | $10.6 billion | | 2 | Kraft Foods (KFT, news, msgs) | 6/12/2001 | CS First Boston | Food | 8.7 billion | | 3 | United Parcel Service (UPS, news, msgs) | 11/9/1999 | Morgan Stanley | Transportation | 5.5 billion | | 4 | CIT Group (CIT, news, msgs) | 7/1/2002 | Goldman Sachs | Consumer loans | 4.6 billion | | 5 | Conoco, now ConocoPhillips (COP, news, msgs) | 10/21/1998 | Morgan Stanley | Oil and gas | 4.4 billion | | 6 | Travelers Property Casualty (TPK, news, msgs) | 3/21/2002 | Citigroup | Insurance | 3.9 billion | | 7 | Goldman Sachs Group (GS, news, msgs) | 5/3/1999 | Goldman Sachs | Investment banker | 3.7 billion | | 8 | Agere Systems (AGR.A, news, msgs) | 3/27/2001 | Morgan Stanley | Telecommunications | 3.6 billion | | 9 | Charter Communications (CHTR, news, msgs) | 11/8/1999 | Goldman Sachs | Cable TV | 3.2 billion | | 10 | Lucent Technologies (LU, news, msgs) | 4/2/1996 | Morgan Stanley | Telecommunications | 3 billion |
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*offering price times total shares offered
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