May 5, 2004

In a filing to the US Securities and Exchange Commission, Google said only US residents would be able to participate in the forthcoming IPO auction.

The company, whose mantra is to "make the world a better place" said: "We have not undertaken any efforts to qualify this offering in offers to individual investors outside the US".

THE UK Shareholders Association, the largest organisation of private investors in the UK, last night expressed its dismay that the millions of UK devotees of search engine Google are to be barred from investing in the US-based company when it floats later this year.

Therefore, individual investors located outside the US should not expect to be eligible to participate in this offering.

David Blundell, chairman of UKSA, told Scotland on Sunday: "Google publicly states that it is a global company. Why then should only US private shareholders be able to take advantage of its forthcoming flotation? A great many potential UK shareholders will be extremely disappointed."

In the US, financial intuitions are wary of a set of rules Google has laid down for its much-anticipated initial public offering, which fly in the face of accepted Wall-Street wisdom.

In the wake of numerous investigations into investment banks that doled out coveted IPO shares in the 1990s to favoured clients in exchange for future business, Google has decided to hold a Dutch auction, designed in part to shut out Wall Street firms from profiting from conflicts of interest.

Under the prevalent Wall Street system, a company going public fixes the amount of shares it wants to float and the underwriting investment banks set the price in advance - normally well below what the market will bear.

Shares are distributed beforehand, mostly to big institutional investors who often do business with the investment banks. Once the shares start trading they typically soar in price, so the original holders of the IPO certificates quickly cash them in for hefty profits.

Peter Thiel, founder of the hedge fund Clarium Capital, said: "Surprise, surprise, the shares go up a lot and the banks get a commission. And the only people who lose are the retail investors and the company, which doesn’t get as much money as it otherwise would.

"It’s high time that a company with the stature of Google does something like this because what it means is that the shares go to the people willing to pay the most."

Larry Page and Sergey Brin, maverick computer scientists who founded Google in 1995, will refuse to make quarterly earnings predictions and vow not to make management decisions as a quick fix for the share price.

Page and Brin are critical of what they clearly perceive as Wall Street’s old boy network. The word on Wall Street is that Goldman Sachs so disliked the auction idea that Google may have bypassed it to be the lead underwriter.

But with stated profits last year of $346.7m (£194.2m) on a 62% margin derived almost entirely from advertising, Google’s shares are expected to be so sought after that the underwriting banks, led by Morgan Stanley and Credit Suisse First Boston, still stand to profit even if they are cut out of shares allocation process.

Google hopes to raise $2.7bn with its offering. Such a large IPO has never been sold through an auction before in the US. Page and Brin said: "Our goal is to have an efficient market price - a rational price set by informed buyers and sellers - for our shares at the IPO and afterward.

"Our goal is to achieve a relatively stable price in the days following the IPO and that buyers and sellers receive a fair price at the IPO.

"Many companies have suffered from unreasonable speculation, small initial share float, and boom-bust cycles that hurt them and their investors in the long run. We believe that an auction-based IPO will minimise these problems."

Google intends to issue two classes of shares in order to keep management decisions firmly in the hands of the founders and their managers, who will receive super-voting shares.

Source: Business Scotsman

        

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