By Ben White Washington Post Staff Writer
Friday, April 30, 2004; Page E01
NEW YORK, April 29 -- Think you have no chance of scoring Google Inc. IPO shares?
The Internet search firm plans to use an auction system infrequently used in the United States to allocate most of its initial public stock offering. It is an attempt, the company said, to make the IPO "inclusive of both large and small investors."
Essentially, Google will allow qualifying investors with brokerage accounts at its two underwriters, Morgan Stanley and Credit Suisse First Boston, to submit bids listing how many shares they want and what price they are willing to pay. The bids will create a "master order book" that only Google and the underwriters will be able to see. Individuals who are interested in making bids for Google need to open accounts at the underwriting firms before the IPO. The Wall Street firms will determine who is a "qualified investor," which could limit the ability of small investors to participate.
Google and the underwriters will use information in the master order book to determine a "clearing price," the highest price at which all the shares can be sold to potential investors. Those submitting bids at or above the clearing price will be eligible to receive IPO shares. Those with bids below the price will be out of luck.
This method often is called a "Dutch auction," said to have been modeled on a system used in Amsterdam to sell tulips. But Google's approach is slightly different from the usual model . In its filing with the Securities and Exchange Commission on Thursday, the firm promised to use the clearing price as only the "principal" factor in setting the IPO price. The actual IPO price could be lower than the clearing price, Google said. Google said in its filing that the allocation will be done "primarily" through the auction, without commenting on what else might be involved.
Google also said it may decide to increase the number of shares sold during the IPO if the price rises during the auction. This means bidders will not know the total size of the offering when they submit what prices they are willing to pay.
That is a drawback, said Alexander Ljungqvist, an IPO expert and professor at New York University's Stern School of Business.
"That's like [auction house] Christie's saying they are selling one" expensive work of art, only to see the price go up and say it is selling two.
Ljungqvist also criticized Google for not settling on a process for dealing with a situation in which there could be more successful bids for shares than there are shares available. In its filing, Google said it would use one of two methods to deal with such a situation. Both are complex.