The How and Why of Google's Auction


You don't even have to love Google's search engine to be able to buy Google's stock. Just about anyone can bid for the shares when the search leader comes to market sometime in the next six months. That's because co-founders Larry Page and Sergey Brin, along with CEO Eric Schmidt, have designed an initial public offering that's accessible to all investors who want in. (see BW Online, 4/30/04, "Democracy and Control in Google's IPO").

That has created a lot of buzz on Wall Street and off, leaving lots of potential investors -- many perhaps newbies -- wondering how this unorthodox IPO-as-auction will work. Here's a quick primer on the ins-and-outs of the process:

Q: So what do I do? Call my broker, or log on to my brokerage account and ask to buy Google shares?

A: Let's back up first. Google will be using something called a "Dutch auction." It's named after a process used in Holland to bid on flowers. Here's how it works: You and everyone else makes a bid on what you would pay for a share Google stock and how many shares you would like. When all the bids are in, Google will allocate shares on a pro rata basis to anyone who has bid at or above the initial IPO price, which is set by a threshold price that Google will accept.

Q: Cool! Just like shopping on eBay!

A:Yes, and no. The Google IPO will be a bit more complex than eBay (EBAY). Google is reserving the right to change the number of shares in the IPO as well as the price during the bidding. If it finds the offering gets a bid price to its liking, it could increase the number of shares it will sell. It could also reduce the number to get the price up, but that's less likely, given the huge interest in this IPO.

If you're really serious, make sure you read the S-1 documents on file for Google with the Securities & Exchange Commission first. These are what a company files as formal notification that it intends to go public.

Google's S-1 provides the first intimate look at hard numbers coming out of the Googleplex. Also read the IPO prospectus, which explains how the IPO process will work and how the auction will proceed.

Q: Is the prospectus available online yet?

A: No, and Google hasn't said when it will be. But if you follow the news, you'll learn when it's available -- probably within the next two months and with plenty of time to read before the auction process begins. Most likely it'll be posted at the SEC's Web site and probably at Google's as well, so you'll be able to download it from those sources.

The prospectus will contain an estimated price range for shares sold during the IPO. No one knows yet what that range the will be. Google hasn't filed that estimate and is keeping mum.

Q: O.K., what happens when the price range is set?

A: According to information already filed, Google says you'll need to apply for a unique identification number at a Web site designated for that purpose. You'll use this ID to bid for the shares. Some qualifications may be needed to get an ID, but they should be minimal if Google really wants to include all individual investors.

Q: After I've read the prospectus, done my homework, and gotten a unique ID, what's next?

A: You'll then need to contact a participating brokerage house that's helping to underwrite the auction. Google hasn't listed all of them yet. The only ones named so far are Morgan Stanley (MWD) and Credit Suisse First Boston (CSR). CSFB doesn't have a retail brokerage arm since it deals only with big institutions and high-net-worth clients. And not everyone has a Morgan Stanley account.

Q: I'm one of those who doesn't...

A: Don't fret. Insiders say Google will add dozens of secondary underwriters, all of which will have good access to shares. So if you have a brokerage account with any of the participating underwriters, you can enter a bid. If you don't, you'll need to open one. Most brokerages have a minimum capital requirement these days, but it's probably no more than $1,000 or so. That's well within reach for most investors.

Q: What do I do after contacting a participating broker?

A: It will send you to a Web page where you'll submit your ID and enter a bid. But you'll also be able to submit a bid via phone or fax.

Q: How do I know how much to bid? Will the shares have a starting price, or a reserve price, like on eBay?

A: If you haven't done your homework and bid too low, you won't get any shares. If you bid way too high the underwriters may decide you are a speculator and then not award you shares, as is their right according to the terms of the auction. So bone up on what Google is likely to be really worth and then decide what you think the actual price will be. A hint --expect it to go up from the listed price range on the prospectus.

Q: Say I make a good bid and get to buy some shares, what should I do? Flip them fast for a profit?

A: That's exactly what the Dutch auction is designed to discourage. In the past, Wall Street investment banks intentionally underpriced IPOs so that big institutional clients and high-net-worth individuals could quickly flip shares and make a killing. That's why Internet stocks often doubled and tripled on the day of their offering.

With a Dutch auction, the collective wisdom of all participating bidders sets the price, so the likelihood that shares will appreciate wildly on the first day is much lower.

Google's founders explicitly warn in the IPO filing against speculating on shares on a short-term basis. They also reserve the right to eliminate bids they deem to be speculative. So if you're going to buy, buy for the long haul.

Q: Wouldn't it be easier to just buy a mutual fund that has Google shares?

A: You could do that. A number of funds will buy into the IPO. Just do your normal due diligence to make sure the funds are reputable. Check them out on Morningstar or on your own broker's site. Your broker may even offer these funds already. A fund that will most likely carry some Google shares is Renaissance Capital IPO Plus Fund (IPOSX).

But remember: Google will be just one stock in any fund you buy, and you'll have no control over whether the fund hangs on to its Google shares. And that may not be good enough for investors who buy into the long-term strategy Google's braintrust is espousing. By Alex Salkever, Technology editor for BusinessWeek Online


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