Google Inc's share sale has put Wall Street on notice: The old way of doing business may be ending.
The six-year-old Internet startup based in Mountain View, California, dodged US investment banks and auctioned shares directly to investors. The initial public offering's 28 underwriters, led by Credit Suisse First Boston and Morgan Stanley, received half their usual fees because they weren't needed to find buyers.
"It threatens the large profits Wall Street has made over generations," said Sam Hayes, professor emeritus of investment banking at Harvard Business School. IPOs by Dutch auction "will gradually supplant the traditional IPO."
Managing IPOs, among Wall Street's most lucrative assignments, often pays fees 10 times greater than underwriting investment-grade corporate bonds. Bank fees for US IPOs have averaged 5.7 percent so far this year, little changed from where they stood in 1999, data compiled by Bloomberg show. In Europe, banks competing to manage IPOs have cut fees to the lowest level since 1998.
Shares of Google, owner of the world's most-used Internet search engine, jumped 18 percent yesterday in their first day of trading, rising US$15.34 to US$100.34 on the NASDAQ Stock Market.
Google ended its IPO auction the day before, selling 19.6 million shares at US$85 each to raise US$1.67 billion. It was the second-biggest offering by an Internet company after the US$1.9 billion offering by Genuity Inc. in 2000. Genuity filed for bankruptcy in November 2002.
Missteps
A series of missteps by Google executives forced the company to halve the value of the offering, reducing the price from an initial forecast of as much as US$135 and reducing the number of shares offered. Still, the transaction was completed in the face of a flagging market that stifled demand for new stocks. Nineteen US companies have withdrawn or postponed their IPOs this month.
"It was successful," said Mark Herskovitz, who manages US$2.2 billion in technology stocks for Dreyfus Corp in New York. "The amount of money they raised was huge. The stock even at US$85 has a pretty high valuation, so the company made a lot of money." He declined to say if he bought shares.
The sale gave Google a higher market value than Amazon.com Inc, the world's largest online retailer, valued at US$16 billion, or IAC/InterActiveCorp, the world's largest online travel company, valued at US$16.4 billion. Yesterday, Google was one of only 20 companies on the New York Stock Exchange, Nasdaq Stock Market or the American Stock Exchange whose shares traded for more than US$100 each.
Auctions, besides cutting the lucrative banking fees of traditional IPOs, make the process more open and transparent to smaller investors, Google and other backers say.
"If you have an auction, you get supply and demand financing," said John Coffee, a professor of securities law at Columbia University.
"Wall Street doesn't like auctions and wanted this one to fail, but it didn't fail. You will see more auctions."
It may take years for the auction to dominate because few on Wall Street will champion it, said Harvard Business School's Hayes, 69. "It requires 500-pound gorillas to do it: companies, like Google, that can go over the heads of investment bankers directly to investors. It could take a number of years."
Equity underwriting, including IPOs and subsequent stock sales, accounted for more than 35 percent of investment-banking revenue at New York-based Morgan Stanley in the second quarter and more than 20 percent at Goldman, Sachs & Co, also based in New York.
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