Some see Google Dutch auction in 2004 ( 2003-12-22 11:29) (Agencies)
With no initial public
offerings on the calendar for the rest of the year, talk has turned to 2004 and
increasing speculation over an anticipated Google offering.
When the Internet search engine company finally does go public, perhaps
sometime in the first half of next year, some are suggesting the expected $16
billion offering might be made in a "Dutch auction," as opposed to the
traditional Wall Street route through investment bank underwriters.
In spite of several published reports that it might chose the auction route,
Google has said only that the company had no public announcement about its
plans.
Opinion is divided over the possibility of a Google IPO auction.
In a Dutch auction, or uniform-price auction successful bidders pay only the
price of the lowest accepted bid. The concept has not been generally embraced by
Wall Street traditionalists, who prefer the status quo that allows for
underpricing in which quick profits can be made when the share price rises on
the first day of trading.
Yet as Wall Street has come under increasing scrutiny amid accounting
scandals, insider-trading and conflicts of interest, auctions are gaining
support as an alternative to the "old boy's network" of Wall Street as a more
equitable way for firms to raise capital, and allow many people to invest rather
than a favored few.
ARBITRARY PRICING, PREFERENTIAL
ALLOCATION
The San Francisco firm of W.R. Hambrecht, a leader in Dutch auctions, has
completed several Dutch Auction IPO's since 1999, including Salon.com, Peet's
Coffee and Tea and Ravenswood Winery. Hambrecht views this as a viable
alternative to Wall Street's traditional handling of IPOs..
"The traditional system has two problems: arbitrary pricing, and preferential
allocation," said Clay Corbus, head of investment banking for Hambrecht.
"The investment bank says 'this is the price' and then distributes shares to
special clients. It is not in the best interests of the (IPO) company.
"The current system favors traders instead of investors. Potential investors,
who want to own shares, are shut out, it's an insider's game," said Corbus.
He said the historical reasons for underpricing are sound since it encourages
investors to buy more shares in the after-market. "But in the late 90s that
discount became institutionalized," said Corbus.
"There was a big hangover from '99 and 2000 and people realized they got
caught up in the euphoria. They lost sight of what an IPO is. It's
capital-raising not a marketing event."
He said auctions were a way of ensuring transparency. "Everybody is on a
level playing field. When you get away from that there is a potential for
corruption."
In contrast, Bruce Foerster of South Beach Capital in Miami, is not a fan of
Dutch auctions. "What's wrong with Wall Street favoring its best customers?"
"Companies have been going public in the manner of today since the 30's, it's
worked pretty well since every free market in the world emulates the way we
raise equity capital.
"But a notion developed in the late 90's that companies were leaving money on
the table (underpricing)."
At that time, he said, dot-com companies were opening at big premiums above
the IPO price. "You don't see a lot of deals open at monstrous premiums today
but who is being harmed?"
CONFLICT OF INTEREST
There is a historical role for middlemen, dating from Marco Polo, he said.
"Conflict of interest won't go away so the investment banker is in the middle to
ameliorate conflicts."
Timothy Pollock, a business professor at the University of Maryland sees
advantages and drawbacks to auctions.
"The advantage for a company (going public) is that it can typically get a
higher price, because the bidding occurs before the final price is set," Pollock
said, "The price is bid up until the allocation is filled that means less
underpricing or 'money left on the table'."
Pollock also noted that shares are more widely held by a pool of investors if
a company is worried about control. "In an auction it's more egalitarian," he
said.
As for disadvantages? "If an IPO doesn't have a bump in the stock price on
the first day, it's widely perceived as being a failure," Pollock said.
"Lots of offerings have a first day jump and it brings publicity to a firm.
So you could think of the money left on the table as an advertising expense."
He said studies have shown that underpriced IPOs are more likely to have
second offerings, get more analyst coverage and are more likely to survive five
years.
Professor Dan Dalton, dean of the Kelley School of Business at Indiana
University said: "At best, an auction will raise more money for the company, but
not necessarily for investors.
"A Dutch auction will get you closer, more quickly to what the market
believes the price should be," he said.