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Can Google Go Dutch?

Tongues are aflutter over how search darling Google might conduct its expected initial public offering -- while Google has kept a safe distance from the chatter.

The IPO, which could raise as much as $4 billion, has provided months of panting speculation about its date, terms, size and method. Will Google use the so-called book-building method, in which lead investment banks set the price behind closed doors, then use shares to reward favorite clients? Or will it embrace the spirit of the Internet and open its arms -- and its IPO shares -- to all the little guys that love it?

The questions are just the latest parlor game in the Internet industry over how the company would float the shares. Will Google use the Dutch auction method championed in the U.S. by investment firm WR Hambrecht & Co.? By auctioning all or part of the opening shares, at least individual investors would get a shot at a piece of the offering.

The idea of a share auction is particularly apropos for Google, which has done well by doing well for a host of small advertisers. Its AdSense program, for example, provides a level playing field for advertisers with its open bidding system on placement costs. As a result, Martha Stewart and your mom have an equal shot at getting the top rank in paid listings returned in a search for "apple pie."

In the book-building process used in a traditional public stock offering, however, bankers have been known to set the initial price below what they think the stock could fetch, so that those who buy IPO shares are sure to profit.

"They leave a lot of money on the table, which ingratiates the underwriters with their buy side clients but doesn't give the issuing firm as much proceeds," said Jay Ritter, Cordell Professor of Finance at the University of Florida. Nor are the bargain-priced shares available to all of the underwriters' clients. "If Martha Stewart wants the shares, she'll get them," he said. But an investment bank's rank-and-file customers won't be in the queue.

In Hambrecht's version of the auction model, called OpenIPO, would-be investors bid for a set number of shares at a set price. When the bidding is over, OpenIPO finds the "clearing price," the highest price at which it can sell all the shares. That becomes the maximum offering price for all shares.

All bids are treated equally; the share allocation is based on price and has nothing to do with the size of the order or the bidder's relationship with the underwriter. Those who bid at or above the final price will get shares; anyone who bids below the final offering price is out of luck.

The Dutch auction has two advantages over book-building, proponents say. More money goes into the coffers of the issuing company, and it's more fair, because small investors have an equal chance at getting IPO shares.

"The traditional book-building system of going out and polling out a few investors does a terrible job of pricing," said Clay Corbus, Hambrecht's senior managing director, who said some hot offerings shoot up as much as 40 percent the first day. "Nor does it give you the correct allocations."

Genitope , a Redwood City startup working on personalized cancer vaccines, is the most recent company to go public using OpenIPO. Its October 2003 offering raised some $33.3 million. Former CFO Fred Kurland (who resigned to join another company on January 29), told internetnews.com the process worked to the company's benefit.

"The very nature of OpenIPO almost forces a company to see what the market is telling it about its value," Kurland said. His company also liked that the process was literally an open book. "Unlike in the more classical process, Genitope was able to see 'the book,' the list of all the institutions and individuals who had made bids on the stock. In the classic situation, the lead investment bank...would not reveal to anyone who was on the book." Another major factor in the choice, he said, was that the company and the bank work in partnership to decide the price and to whom the stock would be sold. "We found that very compelling."