Saturday, May 01, 2004

Google IPO Mania Slows SEC Web Site

It looks like quite a lot of people have failed to learn their lessons from the great IT stock bubble whose bursting we're just starting to recover from. I can understand competitors and financial analysts being interested in Google's S-1 filing, but what point is there in ordinary people wasting their time paging through hundreds of pages of financial documents when the auction process that's been settled on ensures that there's no absolutely no chance they're going to make a killing by being in on the game early?

Intense interest in Google's initial public offering slowed the performance of the Securities and Exchange Commission's Web site, which hosted the search company's financial documents.

Keynote Systems, an Internet performance measurement company, said Friday that Google's IPO registration filing increased traffic to the SEC's site by 900 percent, leading to a significant slowdown. From 5:30 p.m. to 6:30 p.m. it took as long as 45 seconds to download the SEC home page compared with the usual four seconds. During that hour, about 80 percent of the Web surfers who tried to download the SEC homepage were unsuccessful.

Scrutinizing the S-1, I'm glad that Google's financial numbers look as healthy as they do, as it validates the belief I've always held, even through the dark days when the Nasdaq was plunging like a stone, that search was the killer application on the web; I'm also certain that Google's financial profitability will continue to shoot upwards for quite a while to come, whatever threatening noises Microsoft and Yahoo may make. Nevertheless, there's a fair price to be paid for anything, and although Google's founders are greatly to be commended for opting for an auction process rather than allowing investment bankers and their favored clients to cream money off by quickly flipping the stock, the downside of this for investors is that this is one stock that ought not to see a meteoric appreciation in price shortly after its listing - if the market in Google stock is dominated by rational investors, that is. It will be interesting to see if that last assumption is borne out.

While we're at it, this is as good a chance as any for me to say that I've always wondered at the stupidity of founders who were happy to see their stock prices streak upwards after a "successful" IPO, as such thinking betrays a complete misunderstanding of what public offerings are all about. The ostensible reason companies give for offering stock to the public is to raise money, and if one's intention is to raise the maximum amount of money for one's firm while selling off the least amount of equity, one ought to be enraged rather than pleased when bankers price one's stock so low that others can double or triple their money overnight simply by holding the stock for a brief while after the public offering. A stock price that shoots up like a rocket after an IPO is a sign of banker failure rather than success, and Brin and Page show a level of financial sophistication in understanding this much that is rare even amongst those who supposedly do this stuff for a living. The traditional IPO system is extremely inefficient and deeply corrupt, and it's well past time that it was done away with in favor of auctions.

For months, investment banks vied to win the job of underwriting Google's much-anticipated initial public offering. But as details emerged yesterday about the unusual auction process that Google's founders have chosen, questions have arisen about whether the scramble for a piece of the action was worth the trouble.

Google hired Morgan Stanley and Credit Suisse First Boston as underwriters, but it might as well have hired eBay. Gone is the bankers' flashy road show to sell investors on the deal, gone are the complex valuation models that bankers toil on to set the offering price - and gone are the high fees. Executives close to the deal said the banks would get a fee of about 3 percent, or $81 million, of the total offering. Though not small change, that is down from the 7 percent they typically charge - in this case $189 million.

Google's offering does away with all that in favor of an egalitarian auction where investors help run the show, and they do it all online. Investors, in large part, will have to sell themselves on the deal by reading the sales materials online, placing bids that will set the price online and eventually buying the shares online.

Unlike many companies offering stock for the first time, Google is so well known that it does not need brokers to attract investors. Still, while this setup may not work for many other companies, the idea of its being embraced by the biggest and most promising companies is making Wall Street nervous. One banker working on the offering yesterday complained, "Let's hope this doesn't become a precedent."


As online stock trading has sharply reduced commissions over the last 10 years, the 7 percent underwriting fee is in many ways that last purely high-margin business on Wall Street - and it is a fee that bankers have guarded zealously.

In justifying it, bankers have talked of the costs involved for the research from their high-priced analysts as well as the distribution and sales support needed to make the deal a success.

Google, in rejecting the traditional Wall Street way of going public, has also eliminated the ability of banks to allocate hot shares to their best clients, a practice that yielded windfall profits to favored investors during the technology boom.

"If ever there was a company to take on the cabal of underwriters it's Google," said Andrew Klein, the founder of Witt Capital, one of the first investment banks to advocate the use of the Internet in bringing companies public. "The reality is that there is not much for the banks to do, so why give them $100 million in fees?"

By the way, I once used to work at Credit Suisse First Boston, so I've seen this process from the other side; I'm not some ignorant anti-corporate type bashing bankers whose jobs I don't understand. Not only is a failure to appreciate what makes for a "successful" IPO shockingly common on Wall Street, but the interests of investment bankers and would-be stock-sellers are fundamentally misaligned, particularly when the bankers also have brokerage arms that need to cater to major clients by offering sweetheart deals.

PS: Guess what the exact amount of the Google stock offering is? $2,718,281,828. Does that number look familiar? It ought to!