Google's Dutch auction adds buzz to already-hot IPO

In case you were watching the Olympics and missed it, the much-ballyhooed Google IPO came and went. Much like the Olympics, Google's sprint to the finish line seemed less the point than all the breathless coverage, both pre- and post-event.

In case you were watching the Olympics and missed it, the much-ballyhooed Google IPO came and went. Much like the Olympics, Google's sprint to the finish line seemed less the point than all the breathless coverage, both pre- and post-event.

The Google IPO was about as close as Wall Street gets to the Olympics. Some of us tuned in to root for the victors; others hoped to see the front-runners stumble. For those who wanted to exercise a good bit of schadenfreude, Google never slipped off the pommel horse. Surely there was a bobble here, a botched element there, but on the day of the pricing, the stock shot up respectably - the Wall Street equivalent of a gold medal. The only thing lacking was a Katie Couric interview with the Google founders. So for all the analysis and predictions, for all the talk about whether Google would be a good investment or if the Dutch auction process would work, did we learn anything from Google? For all the market revolutionizing that the Google IPO was to usher in, the message turned out to be an old one. Yet again, the medium was the message. Google's Dutch auction created such a constant publicity buzz that the iconic fame of the IPO far outstripped its fundamentals. Way back when the Google execs decided to go public, they also decided to democratize the offering process. Misters Page and Brin, the two ubergeniuses who dreamed up Google in a Stanford graduate-school class, wanted to give individual investors the ability to purchase shares in the Google IPO. Typically, investment banks reserved shares of hot IPOs for major institutional investors, who often profit handsomely by flipping shares moments after the pricing. Google's management surmised that individual investors, many of the same people whose use of the Google search engine made it a household name, would be more likely to purchase and hold the stock as a long-term investment, thus reducing trading volatility. To accomplish this, Google implemented a Dutch auction process rather than relying on the traditional investment-banking-sponsored IPO road show to institutional investors. Once this unique mechanism for pricing the IPO became part of the picture, the media circus truly began. Would the Dutch auction process work? Would the price be fair? Would individual investors get stuck with the shares? Which investment banks would get fed up and drop out of the IPO? Google had more slicing and dicing than a Veg-O-Matic. Somewhere in the midst of all this, the IPO got delayed because its loquacious CEO spoke with the press, breaking quiet-period rules. As a traditional tech IPO, however, did not have Google's unique mechanism to provide coverage longevity. Minor problems plagued the Google IPO, creating even more news flow but never really derailing it. At the very last minute, Playboy magazine published a pre-quiet-period interview given by Google's founders. To satisfy the Securities and Exchange Commission, Google reprinted the Playboy article in its prospectus and even corrected factual errors. Can you imagine SEC examiners reading Playboy and deciding what errors to correct? The mind reels. What stuck was the daily drumbeat of Google coverage. Google was famous in a fame-crazed society. Who cared if Google was fairly priced or had longevity as an investment? It was hot. Ultimately, Google was supposed to revolutionize capital markets. In the end, it priced and started trading like a traditional IPO. The initial price and shares offered were too high. The investment bankers reduced both, ensuring a 15% pop when trading began. And the individual investors who were supposed to buy and hold? They proved that the institutions had nothing on them. They flipped their stock as fast as any seasoned money manager at Fidelity, laughing all the way to the bank. Google could have brought greater numbers of individual investors into its IPO simply by asking investment banks to change the allocation ratio between institutions and individuals - the Dutch auction was not necessary. Judging from the first-day trading, the desired loyalty of individual investors never materialized. But had Google done a traditional IPO, would the relentless coverage have abated? Clearly because of its importance as the one truly sizeable tech IPO this year, Google would have garnered press. The pattern, however, would have had more of the lulls of a traditional IPO, a little buzz at the filing and a little more at the pricing. And far less sizzle. The Dutch auction was worth its weight in publicity.
  • Howard Zar is head of investor relations at Porter Novelli.

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