June 7, 2004

As Wall Street and some investors gear up for Google's US $ 2.7 billion initial public offering of shares, an obscure group of academics known as auction theorists are already trying to figure out the best way to get a piece of the action.

The internet search engine's plan to go public through an auction has captured the attention of these researchers, who analyse bidding mechanics. That means they anticipate how bidders will behave, how much they are likely to spend and whether winners pay too much.

Legg Mason portfolio manager Bill Miller, who is considering bidding for Google shares, has consulted two such theorists. Even Google consulted one of the best-known auction theorists - essentially odds-makers who analyse the best strategies for making a winning bid.

"I'm becoming very popular," says Matthew Rhodes-Kropf, who specialises in auction theory at Columbia University's business school in New York.

Under the system outlined so far by Google, investors will register with investment banks underwriting the offering, indicating how many shares they want and the price they are willing to pay. Google and its bankers will consider the bids and other factors to determine a "clearing price" at which all of the bids could be sold. Anyone bidding below the clearing price won't get any shares.

Auction theory is related to the serious study of games in which researchers use economics, mathematics and psychology to assess the way people make decisions. And they aren't just finding ways to win at poker: game theory has been used to study financial markets, war strategies and airport-landing fees.

Auction theory is playing a role in big business, too. In 1994, auction theorists from Stanford University in California helped the Federal Communications Commission set up rules for an auction to sell wireless spectrum worth $US20billion. Energy companies have consulted auction theorists when bidding on foreign oil leases. In 1996, Columbia University's William Vickrey won the Nobel Prize in economics for his research on auctions.

Auction theorists find Google intriguing because so many individuals are expected to bid. By pursuing an auction, Google is shunning the traditional IPO model in which professional investors buy most of the newly issued stock.

A pool of bidders that includes professionals and individuals means there is more of a chance some will bid too high, say auction theorists. Furthermore, individuals are unlikely to use the same criteria to analyse Google's value as professional investors, they say. Also there are bound to be different views of Google's value depending on how long the shares will be held.

"It's an unusual situation," says Paul Milgrom, a Stanford auction theorist who recently discussed the process with Google executives. He declined to talk about the meeting, citing a confidentiality agreement.

Like most auctions, one of the biggest risks is what is known as "the winner's curse", an outcome in which a bidder triumphs by overpaying.

"We only have bits of auction theory about how people behave in these situations, so this is a unique opportunity in that sense - it's a $US3 billion experiment," says John Miller, an economics professor at Carnegie Mellon University in Pittsburgh.

Source: F2 Network

        

Read Serge Thibodeau's daily blogs on search engines at Serge Thibodeau Live. We strongly suggest you bookmark our web site by clicking here.

Get your business or company listed in the Global Business Listing directory and increase your business. It takes less then 24 hours to get a premium listing in the most powerful business search engine there is. Click here to find out all about it.

Rank for $ales strongly recommends the use of WordTracker to effectively identify all your right industry keywords. Accurate identification of the right keywords and key phrases used in your industry is the first basic step in any serious search engine optimization program. Click here to start your keyword and key phrase research.

You can link to the Rank for Sales web site as much as you like. Read our section on how your company can participate in our reciprocal link exchange program and increase your rankings in all the major search engines such as Google, AltaVista, Yahoo and all the others.