One of the most unusual elements of the proposed Google IPO is the use of the public auction system via the Internet. Some view it as a laudable move to enable its vast number of individual or retail investors, though in fact they are confined to its subscriber base. In other words individuals (and institutions one must presume?) will have to have an account or open an account with Google to be able to bid for stock in the auction, which is predicted to be oversubscribed. It will enable them to participate on an equal basis with the financial institutions.
The size and interest in the issue will ensure that financial institutions will participate in the issue; they will be unable to ignore it. On the part of the financial institutions there must be understandable disappointment and concern in the use of electronic auctions to launch the issues and treat the bids from the retail sector on an equal footing. This method of sale will ensure that the investment banks, Morgan Stanley and Credit Suisse First Boston, handling the sale of the stock to the public will receive reduced fees through use of this method. Doubtless, this will meet with popular acclaim.
This is an unusual issue of stock. After fulfilling the requirement of proving account eligibility, the prospective subscribers will have to consent to receiving the prospectus in electronic form. The method of valuation lacks precedent and in fact appears to state that the rapid stage of growth for Google is over. The rate of revenue growth will slow and profit margins will become narrower, as Google face more competition and competes in other areas of service provision currently occupied by other organisations. It would, therefore, appear that investors are in for a period of consolidation and increased costs associated with introduction of new services.
There is a two-tier voting structure. This keeps the control of the company in the hands of the founders. In part this is to ensure that Google is not driven by the normal pressure for short-term results by institutional investors - the curse of the management of most contemporary publicly-listed companies. In part it is to maintain some the founders strange maxims: "Don't be evil" and "maintaining its responsibility to the world". How they translate these into practical behaviour will be interesting to see and marvellous to behold.
Launching the issue through this mechanism has a number of very significant risks:
- There is likely to be substantial irrational interest and bidding for the stock by individuals who are "Google groupies". They will want stock at any price.
- Speculative bids will destabilise the stock price, probably sending it soaring in the short term to come down to a realistic price in the medium term.
- Short-term volatility will harm the quality of the stock and could endanger the objectives of the founders to focus on long term growth and value.
- Setting a realistic and stable price will ensure lack of short-term volatility will be an exacting art for the Investment Banks handling the issue.
- Rejecting "speculative bids and bids that have the potential to manipulate or disrupt the bidding process" will have to satisfy regulatory scrutiny and not unnecessarily restrain markets forces. The same comments must apply where they discount very high or very large bids.
On the basis that the issue is very successful the stock will be very widely held. Initially, secondary market transactions are likely to be small in size. The price will reflect that. For institutions to achieve a sizeable holding will not only take time but will be a costly market operation, certainly immediately after the launch, when the price is unlikely to reflect short to medium-term value of the investment.
The biggest concern must be that this method of sale will produce the same long-term results as many of the dotcom era issues: short term gains to the few and longer term disappointment to the majority. That would harm the technology sector. It would dampen enthusiasm for other issues for the sector. Any merit to Internet-based electronic auction mechanism for launching will suffer in consequence.
Let's hope the "Google groupies" stick with their investment for the long term through good times and bad times.