Google, the darling of the techie crowd and the default search engine for almost anyone who spends anytime on the Web, anticipates the IPO will be worth $3 billion.
All of the attention Google is getting hasn’t been good. The Wall Street establishment is generally ticked off because Google chose a very Google-like way to issue the IPO that bypasses the “good old boy” network and goes directly to the investor.
Google’s Format
Google is using a “Dutch auction” type mechanism to distribute shares directly to individual investors rather than the traditional approach, which involves the investment banking establishment and major brokers.With the traditional approach to launching an IPO, most investors don’t have a shot at buying the stock at the original offering price since the investment bankers control which brokers get blocks to parcel out to their best customers.
Most investors get their first chance to buy when these elite few begin selling their shares on the open market above the original offering price. See Understanding IPOs
Overpriced
Google’s format gives everyone a shot at the IPO, however there are some real concerns, beyond Wall Street’s sour grapes, that the mechanism and the hysteria may combine to overprice the stock.Here’s why:
On the surface, the “Dutch auction” seems like a great deal for the investors: everyone pays the lowest last price. What could be better? Well, that’s not quite the whole picture.
If you are interested in buying Google stock you register on their special website and tell them how many shares you want to buy and what you will pay per share. When the IPO is complete, Google starts with the highest price and begins adding up all of the shares until they account for all of the shares in the IPO.
Clearing Price
The “clearing price” is the lowest price for the last share and that becomes the price everyone pays. If the clearing price is $110 and you bid $150, you still pay $110. However, if you bid $109 per share, you don’t get any shares. There is no penalty for bidding high, so if you really want to own the stock, it’s important to bid high enough to ensure that you will be above the clearing price.Do you see how this encourages investors to bid high?
Now add to this format the fact that there are a bunch of people that believe Google can do no wrong and are desperate to own a piece of arguably the hottest property on the Internet and you have a recipe for an overpriced IPO.
