News Archive
Bored With EBay? Try Google's Unusual Auction
By SAUL HANSELL
Maybe you are a fan of Google's search engine. Or you have a few thousand dollars in your portfolio that is looking for a parking place. Or you have always felt left out when corporate bigwigs and their friends and families got in on the ground floor of initial public stock offerings.
Whatever your motive, if you want to take part in Google's novel approach to going public - an online auction of its shares - here is how to proceed. But proceed with caution: Many professional investors are staying away, and a number of financial advisers are counseling individual investors to do likewise.
Google has rejected the clubby tradition in which Wall Street underwriters set the price of a stock offering and
allow only favored clients to buy shares before they begin trading. Instead, the company is holding a vast online
auction that will be open to a wide range of investors, even those who want to buy less than $1,000 worth of stock. Google is not being specific on the timing, but investor registration, which began last Friday, may be closed as soon as tomorrow, according to several people involved in the offering.
The bidding, expected to begin as early as next week, will be a modified version of a Dutch auction, in which the price is set at the highest bidding level that ensures that all 24.6 million shares can be sold. Google, which hopes to raise about $3 billion, has said it expects that price to be somewhere between $108 and $135. The auction could set the price higher or lower than that range. If it is too low, Google might simply decide to call the whole thing off.
Every investment involves uncertainty, of course. But Google's auction, and the company's approach to investors, make its shares riskier than most.
Traditional initial public offerings are attractive because the bankers who manage them try to set the price so that the stock will rise in the first days of trading. Google's auction is designed so that there will be little first-day "pop" in its stock price - and perhaps even a sharp fall, if there are more winning bidders who want to immediately sell than there are buyers in the public marketplace.
"I have a few clients who would want to own Google," said James McGehee, a financial planner with Alpha Financial Advisors in Charlotte, N.C. His advice is to buy the shares only after the market stabilizes in the days and weeks after the offering. "I'm telling them to sit back and take a wait-and-see approach."
Adding even more risk is the volatile market for technology stocks. On Tuesday night, Nanosys, a small but prominent technology company, abandoned its public offering at the last moment, citing adverse conditions in the stock market.
As it conducts its online offering, Google is raising the degree of difficulty for investors by not publishing a
schedule in advance. The registered bidders will receive e-mail messages that may give them very little time to take certain actions, like reconfirming their bids. (Big institutions, and some well-heeled individuals, will be
able to rely on their human brokers to monitor the offering and even enter their bids.)
The process involves filling out a series of forms on the Google Web site ipo.google.com. The site asks for a mailing address, a Social Security number and an e-mail address. Registrants will receive a 20-digit registration number via e-mail.
Investors will also need a brokerage account with one of the underwriters. Some, like the lead managers - Morgan Stanley and Credit Suisse First Boston - prefer to deal with customers with substantial assets. Others - like Charles Schwab, Ameritrade and E*Trade - will open accounts for those with only a few thousand dollars.
Under federal securities law, prospective bidders must be screened to determine if the investment is suitable for them. Through a dozen or so questions on their brokers' Web sites, they will be asked about their resources and investing experience. The broker will determine - usually instantly - if the Google offering is suitable for that client. In most cases, the brokers will also require there to be enough money in the accounts to cover the amounts bid.
As early as next week, the Securities and Exchange Commission is expected to give Google the approval to start
accepting bids. The company will then send registered bidders e-mail alerting them that bidding has begun.
Investors can place several bids, each of which specifies a desired number of shares and a price the bidder is willing to pay. The bids are not mutually exclusive. That means if you bid to buy 200 shares at $120 and 100 shares at $130, and the ultimate price is $110, you will own 300 shares at $110 each. Anyone who has ever watched a speed-talking auctioneer whip bidders into a frenzy before banging down the gavel - or who has participated in eBay's electronic equivalent - will find Google's auction less exciting and more mysterious. Investors will get almost no information about what others have bid until after the auction closes.
The underwriters will monitor the auction, and if they anticipate that the final price will be below Google's $108
threshold or above $162 (20 percent above the top of Google's target range), the company must file a revised
prospectus and notify investors so they can rethink their bids.
The hardest part of the process, of course, is deciding how much to bid. There are myriad techniques that professional investors use in such decisions. A value investor, for example, might estimate how much cash the company will produce over the next several years and what the value of that cash flow might be. A growth investor might assess how well the company will be able to sustain its rapid revenue increases.
But such analysis is difficult for anyone to conduct in isolation. Waiting until after the offering, when the
shares begin trading, would allow an investor to see the consensus price of the entire market. Traditional
underwriters reassure potential investors by setting the offering price lower than the expected market price, but this will not happen with Google.
"You have to do your own homework," said Kent L. Womack, an associate professor who studies auctions at the Tuck School of Business at Dartmouth. "And if you are wrong, you will pay, potentially in a substantial way."
Moreover, in this case, Google appears to have alienated many of the biggest institutional technology investors. To start with, of course, the company is trying to eliminate that first-day price jump that has made so many offerings hot tickets. But some have also been alienated by the cumbersome bidding process, the lack of disclosure on the Google "road show" - the presentations made to prospective investors - and the company's stated plan not to provide quarterly earnings guidance and other information that other companies typically give investors.
"Our clients, which include the most sophisticated investors, have written Google off," said Seth Goldstein,
chief executive of Majestic Partners, a firm that provides research to institutional investors. "They think it's a
joke the way it is being handled.'
Google will not say in advance when the auction will close. The company and its lead underwriters will look at the bids each day and make a decision about when to stop - the point at which there is a price that they deem adequate and that covers all 24.6 million offered shares.
Although the Dutch auction is meant to determine the highest price at which all shares in the offering will be
sold, the company has some flexibility to change the rules as the auction progresses. If there is tremendous demand, the number of shares in the offering could be increased - although doing so would require Google to quickly revise the prospectus and notify the participants, allowing them to revise their bids.
Google also has the option of setting the offering price somewhat below the price determined by the Dutch auction. That might give the stock room to increase in value on its first day of trading. But the lower price, which would increase the number of winning bidders, would probably also mean that investors would get fewer shares than they bid for. (Instead of getting 100 shares at $120 each, for example, the bidder might end up with 90 shares at $115.)
Sometime in the afternoon or evening of the day the auction ends, bidders will receive an e-mail message telling them the final offering price and how many shares, if any, they have bought.
Trading will start the next business morning on the Nasdaq market. The ticker symbol will be GOOG.
Kerry Discusses an Economic Plan, Briefly
Sources speculate on the financial effects of a new Democratic president.
By Laurie Kulikowski
What do flip flops, rope-a-dope, and lollygaging all have in common? They’re all descriptions that critics have given to Sen. John Kerry’s political campaign.
Despite the name-calling that usually ensues with a presidential election, the Democratic Convention ended last night on high note with Kerry accepting a formal party nomination for presidency. Planners and experts alike commented that the Kerry’s speech was to rally supporters and convince those still on the fence to vote for him.
And rallying is what he did. "This was a chance for Kerry to be defined by his own merits not relative to the President," said B.J. Rudell, a political analyst and author of Only in New Hampshire published by Plaidswede Publishing Co. last fall.
One of Kerry’s more quotable lines came toward the end of his speech, "So much promise stretches before us. Americans have always reached for the impossible, looked to the next horizon, and asked: What if?" Yes, what if Kerry should win?
Planners wondered aloud about the future of the country’s large deficit, what effect raising taxes might have, and whether both candidates intend to make good on their promises.
Among the topics that Kerry did cover included:
Creating new incentives to revitalize manufacturing;
Investing in technology to create jobs;
Deterring companies from moving production overseas by closing loopholes in the tax code;
Cutting the deficit in half in four years;
Cutting middle class taxes;
Creating a more unified healthcare system.
However, the speech primarily focused on foreign policy rather than on domestic issues -- unusual for Democrats. "The economy has taken a back seat to foreign policy since 9/11 because no one had faces before. This is Kerry’s time to capitalize on foreign policy. If he doesn’t do it, he’s just a typical liberal Democrat in the eyes of many," Rudell said.
However, critics said that Kerry still has yet to be specific about what he intends to do once in office; last night’s speech didn’t enlighten them. "That hasn’t been answered for me through this convention. It’s been a great rally .. and they’ve laid down the [foundation] to build as much support as they can," said Troy Daum, a financial adviser with Wealth Analytics in San Diego.
In terms of winning the election, there isn’t as much pressure on Kerry, compared with President Bush.
"As the challenger he doesn’t need to run on a record of executive experience – a platform of overtly appeasing everybody. With so many Democrats just wanting Bush out of office there’s [also] less pressure on Kerry to try to work with ‘tax-and-spend’ liberals and deficit-cutting liberals," Rudell said. "The fact is Bush will not be able to seize the deficit reduction issue, so any mention of that by Kerry will be effective regardless of whether he actually intends to do that once in office."
Yet Kerry’s honeymoon would be shortlived if he indeed wins, because most likely he’ll face a Republican-controlled Congress -- making passing legislation extremely difficult.
Regardless, Kerry will have to act fast to show the public that he does plan to reduce the deficit and work for the middle class, notions that he’s mentioned all along. "He will need to signal to the financial markets that he does believe in free trade and in terms of tax issues, that he’s not a totally liberal Democrat," said Greg Valliere, chief political strategist for Schwab Capital Markets, in a March interview. He added that keeping the dividend tax cuts and possibly capital gains cuts would exemplify this.
Still, Kerry would want to repeal most other Bush’s tax cuts and possibly tackle more popular tax issues such as shelters, fraud, and abuse loopholes.
"My clientele is probably likely to be negatively affected by a Kerry administration," said James McGehee, of Alpha Financial Advisors in Charlotte, who serves affluent baby boomers with between $1.5 million and $2 million. "A lot of things are set to potentially sunset. We have a better chance of keeping those things in place with the Bush [administration]."
Depending on what Kerry adopted, planners would most likely have to redo estate plans, wills, and other estate tax avoidance techniques, like family partnerships. "And that's just on the transfer tax side," said Jeff Scroggin, a tax and estate planning attorney in Roswell, Ga.
"Every new President seems to want to fiddle with the tax code," he added. "If there are business tax changes, we will need to meet with our business clients. If there are income tax changes on investments, such as the loss of the capital gain brackets, we will need to meet with our investor clients. If the tax rates increase, we will need to meet with our high income clients."
On personal income side, "we may get personal tax benefits, like AMT relief," Scroggin said, noting that most of the previous tax changes have been leaned toward relief on investments and not necessarily earned income of middle class taxpayers.
But who knows? Like the markets, the election process is not completely predictable. At the very least, the American public should be in for an interesting ride over the next few months.
