NEW YORK – Google’s initial public stock offering has become a lot of work for relatively little return for Wall Street’s brokerage houses, leaving many of them grumbling about an IPO which they still feel they must participate in because of the prestige at stake.
The $2.7 billion offering for online search engine Google Inc. promises to make the biggest IPO splash yet in the post-dot-com era, and 30 brokerage houses have teamed up to facilitate the online public auction the company plans to set its offering price.
The auction system, a rare occurrence on Wall Street, is considered more egalitarian than the traditional IPO, which is heavily managed by brokerage firms and favors larger investors. It’s also much less lucrative for the big brokerage firms, which can make tens or hundreds of millions of dollars from a traditional IPO.
And that has Wall Street investment houses grumbling. The online auction system, while not involving new technologies, does require a great deal of work to link the 30 underwriters to each other and to Google’s central order book. While the firms are not commenting on the work, or the costs involved, sources speaking on condition of anonymity told The Associated Press that the costs far outstrip those of a traditional IPO, while the fees and investment returns will be far less.
The technology involved in the auction system has been a particular sore point for many firms, especially the smaller investment houses that have had to upgrade their own computer systems to meet Google’s stringent security and technology requirements.
Technicians are working to link the 30 separate brokerage houses and Google itself to a master order book. This master system will allow all the underwriters to track the latest bids for Google’s IPO price in real time, and each underwriter must allow would-be bidders to make bids via telephone, the Internet, fax or in person. And all of these connections must be secure.
The heavy media exposure surrounding Google has put many Wall Street firms in an awkward position. At least some of the underwriters would like nothing more than to follow Merrill Lynch’s lead and bow out of the underwriting consortium. Because a large part of the usual underwriting fee involves a brokerage house’s research and due diligence in setting the IPO target price, Google’s auction system deprives the underwriters of that revenue on top of the costs of the technology they must incur.
In addition, the auction system means that there’s a good chance that Google’s target price will be higher than an underwriter would have set. And that means less money for Wall Street firms and institutional investors who buy at the target price and hope for a major push once the stock begins trading.
“Back in the dot-com era, a lot of companies were angry when their target price would be set at, let’s say, $12, and then it rose to $50 or $100 on the first day. They left a lot of money on the table,” said Anthony Pergola, corporate partner at Lowenstein Sandler and a specialist in IPOs. “With the auction system setting the price, it’s the company that’s going to benefit from whatever market hysteria there is, not the friends and family of the directors and not the underwriters who were paid in stock.”
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