Can Google Go Dutch? - Page 2

Some people -- Kurland and Corbus included -- say that Dutch auctions lead to a more stable stock price, because investors aren't getting the stock at an artificially low price and flipping it, or selling it as soon as the price jumps during initial trading. However, the performance of the nine stocks OpenIPO has taken public since 1999 is all over the map, with its best-performing offering, Ravenswood up 180.7 percent when it was acquired last year, and its worst-performing, Salon Media Group , down more than 95 percent.

Dutch auction proponents say that the process is inherently fair, because bids are open to anyone who has an account at the brokerage. "If you open an account with Hambrecht, you're on an equal footing with their best customers," said Ritter. "If you're willing to pay a dollar more than Martha Stewart [for an IPO share], you're more important."

In most cases, said Ritter, "The issuing company is probably going to be able to raise at least as much money with an auction as with book-building. If it's a hot deal, an auction will raise more."

While auction IPOs haven't gotten traction in the U.S., they're fairly common in other countries, according to Ann Sherman, a finance professor at the University of Notre Dame in Indiana. In 1993, she said, Singapore Telecom raised about US$2.7 billion in a hybrid Dutch auction/book-building IPO, while an Argentina Telecom auction raised about US$1 billion in 1992.

"If Google were to do a Hambrecht auction, it would have a good chance of setting off a bidding frenzy that would bring the company much more than it would raise otherwise," Sherman said. "But, as with so many Dutch IPO auctions in the past, the price would probably be unsustainable and would fall later, leading to big losses for the many small investors that might be buying stock for the first time because of their enthusiasm for Google."

Sherman thinks Google should pursue a hybrid model, selling some shares at auction and the rest through book building. She said the hybrid model minimizes the problem of what she calls "free riders." Because all bidders pay the final clearing price, not the price they actually bid, free riders drastically overbid for shares in an auction to ensure they get some. They can really mess up the price, she said.

In the case of OpenIPO, though, brokers review each bid and, if one seems out of whack, they will contact the bidder. They may even reject a bid if they feel the bidder hasn't performed due diligence. "It's not like eBay," Corbus said.

There are other reasons why even an innovator like Google might find it wise to go the old-school route. The prevailing wisdom, according to Corbus, is that an IPO is like healthcare for the kids: Not a good time for experimentation.

"People want to make sure it's a system that works and delivers what it's supposed to," he said. At the same time, he pointed out, while business has been transformed by technology, the rules of investment banking haven't changed since they were set back in 1933. "There are entrenched pattern of behavior, and it takes a while to break out of those."

And Wall Street has its ways. Tom Taulli, a USC professor and author of "Investing in IPOs," said the analyst coverage and research reports issued by big banks can be incredibly influential. While Hambrecht is a full-service brokerage with it own analysts, "a bank like Goldman Sachs has an incredible network of investors, and they probably see every deal you could see." On the other hand, "Banks that feel dissed may tell their brokers not to push the stock quite as much or tell their analysts not to be as positive." Despite SEC reforms, Taulli said, "That's the way Wall Street operates."

In coming to a decision, Google's top management may be having a bit of a culture clash, according to Taulli. Google's founders, Sergey Brin and Larry Page, may want to set their IPO loose on the Internet, while CEO Eric Schmidt is pushing the big bank route.

"He's a very seasoned CEO who really knows Wall Street -- and knows it's a symbiotic relationship," Taulli said.

The Internet has its own symbiosis -- and its own system of rewards. If Google does decide to auction all or part of its IPO shares, it will be engaging in a high-stakes test of the Internet model. Better yet, it will be putting its money where its mouth is.