When the preliminary prospectus becomes available, Google’s underwriters begin taking bids in the auction for the IPO. By following this approach, Google’s management hopes to enable all interested investors to have the opportunity to qualify to bid and, following qualification, place bids in the auction for the IPO.
Google cautions that the Class A common stock may not be a suitable investment for all bidders. Also, a unique bidder ID is not a guarantee that a bidder will receive an allocation of shares. Investors outside the United States will not be eligible to participate in this offering.
The Bidding Process
Google has selected Morgan Stanley & Co., Incorporated and Credit Suisse First Boston LLC to assign the IPO. After the bidding commences, all investors that have qualified to bid may submit bids indicating their interest in Google’s offering through one of Google’s underwriters. To submit a bid, an investor must provide the following information:
- The number of shares the investor is interested in purchasing.
- The price per share the investor is willing to pay.
- Any additional information that will enable the underwriter to identify the investor, confirm their eligibility and suitability for participating in Google’s offering. The underwriter should also be able to determine that the investor has the ability to purchase the shares bided on, if the bid is successful.
Bids may be within, above or below the estimated price range of the IPO on the cover of this prospectus. An investor may submit more than one bid, as long as the bid is for a number of shares greater than the amount stipulated on the prospectus.
The underwriters will have the ability to receive bids from their customers over the Internet, by telephone or facsimile. To participate in the auction for the IPO, the underwriters will require that an investor agrees to accept electronic delivery of Google’s prospectus, any amended prospectus and the final prospectus. If the investor does not consent to electronic delivery they will not be able to submit a bid or participate in Google’s offering.
An investor that does not have a brokerage account with either of Google’s underwriters, but is interested in submitting a bid, may contact one of the underwriters to inquire about opening an account and submitting a bid. The investors should be aware that, due to each underwriter's requirements for new customer accounts, the investor may not be able to open an account with a particular underwriter. In addition, investors that are customers of one of Google’s underwriters may not be permitted to submit a bid due to legal requirements, even if the investor has received a unique bidder ID.
Google’s underwriters will document all bids, including the identity of the bidders, in a master order book that will be reviewed by Google. Thereafter, Google and their underwriters will have the ability to reject speculative bids and bids that have the potential to manipulate or disrupt the bidding process. Speculative bids include bids that are substantially in excess of the high end of the price range printed on the cover of this prospectus. Manipulative bids include inappropriately large bids, or a series of bids that Google and their underwriters consider disruptive to the auction process. Google’s master order book will not be available for viewing by bidders.
The shares offered by this prospectus may not be sold, nor may offers to buy be accepted, prior to the time that the registration statement filed with the SEC becomes effective. A bid received by any underwriter will not constitute an obligation or commitment of any kind by the bidder prior to the closing of the auction and the acceptance of the bid by Google and their underwriters. Therefore, an investor will always be able to withdraw a bid at any time before the closing of the auction and the acceptance of the bid.
The auction process will attempt to assess the market demand for Google’s Class A common stock and to set the size of the offering and the initial public offering price to meet the demand. Buyers hoping to capture profits shortly after Google’s Class A common stock begins trading may be disappointed. During the bidding process, Google and its underwriters will monitor the master order book to evaluate the demand that exists for IPO. Based on this information and other factors, Google and the underwriters may revise the IPO price range as described on the cover of this prospectus. In addition, Google and the selling stockholders may decide to change the number of shares of Class A common stock offered through this prospectus. It is very likely that the number of shares offered by the selling stockholders will increase if the price range increases. In an auction, this could result in downward pressure on the price. The investors should be aware that Google has the ability to make multiple revisions such as the ones above, up until closing of the auction and pricing of the offering.
The Auction Closing Process
Before Google and the underwriters close the auction to bidding, Google will ask the SEC to declare the registration statement effective. The investor will have the ability to modify or withdraw any bid until the auction is closed and successful bids are accepted. If investors fail to confirm their bid before the auction is closed to bidding, the bid will be rejected.
Before the registration statement is declared effective, Google will expect the underwriters to give bidders an electronic notice indicating the proposed effective date. When the registration statement is declared effective, the underwriters will then provide bidders with an electronic notice of effectiveness. Google and their underwriters may close the auction to bidding in as little as two hours after the notice of effectiveness has been given. Underwriters can accept a bid that has not been withdrawn by an investor at any time following the closing of the auction. The underwriter will accept the investor’s bid if the price for Google’s shares set in the auction is at or below the price the investor bid. Once the auction has closed and the underwriters have accepted investors’ bids, the investor will not be able to withdraw it. The investor will receive an electronic notice of the bid acceptance from the underwriter. The investor will be obligated to purchase the shares allocated to them in the auction process, up to the total number of shares represented by the investor’s successful bid.
If the auction is not closed within 15 business days after the effective date of the registration statement, Google will file an amended registration statement with the SEC. If this occurs, Google’s underwriters will require all bidders to reconfirm their bids.
The Pricing Process
Google is anticipating that the bidding process will reveal a clearing price for the shares of Class A common stock offered in the auction. The clearing price is the highest price at which all of the shares offered (including shares subject to the underwriters' over-allotment option) may be sold to potential investors, based on bids in the master order book that have not been withdrawn or rejected at the time the auction is closed. Google intends to use the auction clearing price as the principal factor to determine the IPO price. Additional factors that will be used to determine Google’s IPO price will include:
- Google’s goal of setting an IPO price that results in the trading price of their Class A common stock not moving significantly up or down relative to the market in the days following the offering.
- The prices bid by professional investors.
- Google’s assets, including the current or expected financial performance or book value.
- Other established criteria of value.
Google will set the IPO price close or equal to the clearing price. However, Google and their underwriters have the ability to set an IPO price that is below the clearing price. Google’s IPO price may not necessarily bear a direct relationship to any one of the above factors, and could vary significantly from the initial public offering price. Therefore, only investors that are interested in investing for the long term and who are willing to take the risk that Google’s stock price may decline significantly, are encouraged to submit a bid for the IPO in the auction process.
The pricing of the IPO will occur shortly after Google and their underwriters have closed the auction to new or revised bids. Google will then issue a press release announcing the IPO price. This information will also be included in the final prospectus that is delivered to the purchasers of Class A common stock.
The Allocation Process
Once the IPO price has been determined, Google’s underwriters will begin the allocation process. All investors whose bids have been accepted will be eligible to receive an allocation of shares and a confirmation of their purchase in the IPO. All shares will be sold at the IPO price. The allocation process will not give any preference to successful bids based on the extent to which the bid price per share exceeds the initial public offering price. Investors that do not submit bids in the auction will not be eligible for an allocation of shares in the IPO.
One of Google’s objectives is to establish an IPO price that is equal or nearly equal to the auction clearing price. If this occurs, all successful bidders will be offered share allocations that are equal or nearly equal to the number of shares represented by their successful bids. Investors are expected to submit a bid that accurately represents the number of shares of Google’s Class A common stock that they are willing and prepared to purchase. Google and their underwriters may determine that bids that do not reflect the number of shares that the investor is willing to buy are manipulative and may therefore reject these bids entirely.
In the event that the number of shares represented by successful bids exceeds the number of shares Google and the selling stockholders are offering, Google’s underwriters will allocate the offered shares across the successful bidder group. Google’s objective is to set an IPO price where successful bidders receive at least 80% of the shares that they bid for in the auction. The underwriters, in consultation with Google, expect to use either pro rata allocation or maximum share allocation to allocate shares. Following the allocation process, Google’s underwriters will provide successful bidders with a final prospectus and confirmations that detail their purchases of shares of Google’s Class A common stock and the purchase price. These confirmations and the final prospectus will be delivered electronically.
Pro Rata Allocation
Under pro rata allocation, successful bidders will receive share allocations on a pro rata basis based on the following rules:
- The pro rata allocation percentage will be determined by dividing the number of shares Google and the selling stockholders are offering (including shares subject to the underwriters' over-allotment option) by the number of shares represented by valid successful bids.
- Each bidder who has a successful bid will be allocated a number of shares equal to the pro rata allocation percentage multiplied by the number of shares represented by the successful bid, rounded to the nearest whole number of shares.
Maximum Share Allocation
With maximum share allocation, successful bidders will receive share allocations based on an algorithm. Under this method, successful bidders with smaller bid sizes would receive share allocations for their entire bid amounts, while successful bidders with larger bid sizes would receive no more than a maximum share allocation to be determined using the following algorithm:
- The total of all share allocations must equal the total number of shares Google is offering (including any shares subject to the over-allotment option).
- Each successful bidder will receive a share allocation equal to the lesser of the number of shares represented by their successful bid and the maximum share allocation.
- The maximum share allocation would be a number of shares that results in the full allocation of shares being offered.
Google and their underwriters may implement the maximum share allocation method on a tiered basis taking into account factors such as the size of the bid. Google may increase the size of their offering or take other actions designed to accomplish this objective.
Advantages and Disadvantages
Advantages
The use of public bidding, where people and institutions place offers for Google stock through brokers, gives the IPO an atmosphere of a level-playing field. Advocates of Dutch auctions have promoted them as a way of stamping out the abuses of the traditional IPO process, in which favored clients of big investment banks have often received allocations of hot offerings. Backers say auctions reduce share-price swings because pent-up investor demand is taken into account in setting the clearing price.
Google hopes the process will deter short-term speculation by setting a price that meets demand. The auction could also give Google a better opening price for its shares, and bring it, not Wall Street, more money for its efforts. An auction also should reduce the fees Google pays to securities firms, such as lead underwriters Morgan Stanley (MWD) and Credit Suisse First Boston.
Disadvantages
The process could create intense jostling among bidders as they try to figure out a price that will get them a piece of the deal. Because anyone bidding below the clearing price won't get any shares, there will be an incentive to bid high. Those who bid above the clearing price will be able to buy at that price. Google did not commit to selling shares at the clearing price. Instead, the company and its bankers would take into account other factors, such as reducing the chances for big swings in the share price, in setting an offering price.
There are few IPOs have used similar auctions in the past and those that have were smaller companies, such as Overstock.com Inc., which raised $39 million, and Peet's Coffee & Tea Inc., which raised $26 million. There is no precedence set for such a large IPO in this format.
Wall Street investment bankers have been leery of IPO auctions, saying they can create more volatility in share prices and could initially keep big institutional investors on the sidelines. They contend that professional investors would be more inclined to hold onto Google shares than individuals who might be tempted to flip them for a quick profit. Google anticipates this phenomenon, labeled “winner's curse”, and warns that its share price may decline quickly after the offering, as successful bidders seek to unload some of their shares. The more typical pattern during the tech boom was for shares to skyrocket on the first day of trading from an artificially low IPO price.
Conclusions
Google’s innovations continued to reshape not only the world of search, but also the advertising marketplace and the realm of publishing. It is hard to say what’s next for Google, as one of there chief competitive advantage is surprise and fanatical devotion to users.
Google Inc’s experiment with the Dutch IPO is likely to serve as a benchmark for years to come. However, as a public company, Google’s financial performance will be measured relatively quickly as financial accountability comes to the forefront. A glimpse of Google’s ratings can be found in the following charts from WSJ.com.
As shown, Google rates number 1 in users of its web search service in 2004 which translated to $3.2 Billion in revenue. However, it depends on heavily on its business customers. As shown in Share of Web Searchers in 2004, Google was ahead only to Ask Jeeves in paid users. Finally, Google ranks third in market capitalization as compared to other Internet companies.
In conclusion, Google has taken a major step in competing with ‘portal giants’ like Yahoo! and MSN and has served as a wake-up call to the web-based email industry.