Hambrecht can now talk about Google's IPO

September 15, 2004

Google's auction-style IPO, despite investor complaints and delays by regulators, met the goals the company's founders had for their initial offering, according to investment bankers WR Hambrecht & Co., who helped pioneer U.S. stock auctions.

Free to talk after a five-month quiet period imposed by federal securities regulators, William Hambrecht and Clay Corbus, co-chief executive officers of the San Francisco firm, discussed details of the $1.9 billion deal, the largest Internet offering ever.

The pair, whose firm helped underwrite the deal, talked about Google's pricing strategy, the company's attempts to follow strict government guidelines on sharing information and the way that current rules for pre-IPO companies hinder the pricing process.

When Google, at the eleventh hour, cut the price of the Aug. 18 offering to $85 per share from an earlier price range of $108 to $135, many Wall Street bankers and professional investors declared the IPO auction a failure.

From the outset, though, Google founders Larry Page and Sergey Brin were more concerned about conducting an offering that was fair to small investors than with getting the highest possible price for the company's shares, Hambrecht said.

"For them, the intent was to find the fairest price, not the highest price," said Hambrecht, 68. "What they wanted was an offering where everyone, including their very loyal customers, had the right to compete for shares on an equal footing," he said.

Brin and Page, through a spokesman, declined to comment. Veteran banker Hambrecht founded his firm in 1998 with the idea of shaking up the investment banking world by changing how IPO shares are priced and allocated.

Traditionally, investment bankers decided how much IPO shares would cost and who would get them after gauging demand among a group of favored clients, usually professional money managers.

In the auction method, however, mom-and-pop investors can compete for shares alongside big institutional investors.

"That everyone who bid 85 or higher got the shares is a remarkable achievement in a world where hot issues are doled out in a favored way," Hambrecht said.

Google, adhering to the letter of federal securities laws, irked those institutional investors when it refused to share any proprietary financial information with the professional money managers who were invited to its pre- IPO presentations.

"If they wanted a higher price, they would have treated the big investors with kid gloves," said Jay Ritter, a University of Florida finance professor who has studied IPOs for years.

The idea of an auction had appealed to Page and Brin as early as September 2002, when they asked Ritter whether he thought they should use the auction method for an IPO.

"I told them an auction would be best because the allocation of shares doesn't depend on what kind of commissions (an investor) generates for the investment bankers," Ritter said.

Ultimately, though, Google decided on a hybrid offering in which lead investment banks Morgan Stanley and CS First Boston required the largest U.S. investment firms to place their bids through those two banks exclusively.

That led to a process that was "a compromise between the interests of the (lead) bankers and the interests of the company," Hambrecht said.

"It wasn't an IPO auction in the purest sense," he said. "I think it worked almost in spite of itself," he said. Asked what he would say to other investment bankers who have disparaged the auction model, Hambrecht smiled.

"I would tell them to try it, you might like it," he said.

Based on how the stock has performed in the public markets -- it opened at $100 per share and has traded between $98.94 and $113.48 -- the auction succeeded in setting a price that accurately reflected market demand, according to Corbus.

Successful Google bidders got only 74 shares for every 100 they requested, suggesting that much of the first-day rise was pent-up demand left over from the auction.

In addition, the stock's first-day rise of 18 percent was more in line with big offerings before the boom of the late 1990s, when IPOs often shot up twofold or threefold in their first trading day.

"If you look back at some of the biggest technology deals over time, ones that came out in markets that weren't so hot, they all spiked up quite a bit," Corbus said, "even if you go back to Microsoft or Adobe or Oracle. So on a relative basis, the auction worked pretty well," he said.

In fact, clients of WR Hambrecht placed bids that indicated an auction price of $97 per share.

Neither Hambrecht nor Corbus would disclose what the clearing price was for the entire auction, citing a confidentiality agreement with Google.

The biggest problems with the offering, according to Hambrecht, were caused by the restrictions that federal securities regulators place on all pre- IPO firms about what they can say about their prospects.

Such companies are restricted from providing estimates of their revenue or profit growth during the 12 months after the offering. That number, known to investors as a forward-looking estimate, is crucial to those trying to value a new company's shares.

"The rules are deficient because they don't allow the company to disseminate the single most valuable criterion that investors use to judge value," Hambrecht said.

For example, the initial share price range in Google's IPO documents, $108 to $135 per share, was nothing more than a product of discussions between the company and its bankers, Hambrecht said.

"The underwriters are obligated to put out a price range, but the public has no idea what criteria were used to come up with that," he said.

"Because you're not allowed to talk about estimates, there was the impression of not being forthright. But what it really was, was these guys trying to follow the rules."

Source: SF Gate.com

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