Google, the popular Internet search engine provider, could challenge the established Wall Street equity-underwriting cartel by opting for an electronic auction of its shares for its much-talked-about IPO. If Google manages to pull off such an auction, other companies may follow its lead.
Google is reported to be considering an online IPO.
Google is said to be mulling over how best to execute its introduction to the stock market. The traditional IPO route involving Wall Street and investment banks is expensive. Last year, two-thirds of US IPOs paid fees of 7%, twice the norm of other equity markets. Google has instead mooted the possibility of holding a massive online auction of its shares early next year. This would not go down well on Wall Street, where investment banks have been starved of underwriting fees in recent years.
The online auction is an interesting idea, and if it comes off, it could see other companies follow suit. This could have long-term repercussions on Wall Street, and threaten its stranglehold over the lucrative US IPO business. Wall Street and investment banks have been blamed for the glut of badly thought out IPOs during the boom years. One complaint is that Wall Street’s method of selling shares allows banks to set the prices at a low level, and then offer them to favored investment clients.
Banks argue that there are drawbacks to an online auction. There is a danger is that a pure online auction would risk setting an unrealistically high price for Google shares, since there would not be enough stock available to meet the massive demand from private investors. Another route to market that Google could consider is hiring two or three banks to handle the order building and allocation process, to ensure than no single bank could control the IPO to its own advantage.
What makes Google so attractive is that it has a proven business model, and has established itself as one of the most widely recognizable brands in the world, alongside Coca-Cola and Nike. Google does not reveal financial data, although its profits are thought to be growing rapidly, currently at $150 million, on revenue of $500 million. This means that Google could be in an excellent bargaining position to force Wall Street to lower its fees.
This article is based on material originally published by Computerwire