According to the pregame hype, Google’s IPO was going to substantially alter the structure of Wall Street, enliven the mood of sour markets, and upend the lousy IPO practices of the 1990s. While still a success—Google raised $1.67 billion, largely on its own terms—the IPO of the decade didn’t come close to living up to the promise.
Here’s what Google’s IPO didn’t do.
1. Reignite the technology boom and make the world safe for dot-com IPOs. “This is an exclamation point for Silicon Valley and the tech sector,” proclaimed Paul Deninger, the chairman of technology investment bank Broadview, on April 30, the day after Google announced it was going public. “Tech has been beaten up for three years and Google represents the fact that tech is finally back.” Not quite. The excitement surrounding Google encouraged many other entrepreneurs to grasp at its coattails, just as many also-ran online retailers went public in Amazon.com’s slipstream in the late 1990s. But since April 29, the Nasdaq Composite Index has slumped 8.5 percent. More ominously, several dot-com and tech-related IPOs have been withdrawn, delayed, or reduced in recent weeks. Planetout.com, the money-losing, venture-capital-backed, San Francisco-based portal, announced plans to go public the same day Google did. Last week, it postponed its offering indefinitely. Google’s impressive profit margins simply made many technology companies and dot-coms look weak by comparison.
2. Humble arrogant investment bankers. Google served notice that it could go public without allowing these greedy intermediaries—who in the 1990s had frequently used their positions to enrich themselves and favored clients—to ladle out shares. What’s more, Google announced it intended to pay underwriters a measly 3 percent commission. In response, investment bankers adopted a passive-aggressive attitude. While they went through the motions of marketing the stock, they generally failed to signal their buddies at hedge funds, mutual funds, and institutional investors that they absolutely, positively had to get in on this offering. The number and volume of professional money managers who, as a result, loudly proclaimed their lack of interest in Google at the initial $108-$135 price range may have helped suppress demand. The fact that Google had to cut both the price and the size of the offering was a victory for investment bankers. As for the fees? At 2.8 percent, the underwriters’ fees were “the third-lowest on record for U.S. IPOs of $1 billion or more,” the Wall Street Journal reported. But there won’t be much sobbing in Bridgehampton this weekend: 2.8 percent of $1.67 billion still amounts to about $47 million.
3. Prove that markets can be totally efficient. Google decided to raise money via a modified Dutch auction, which is theoretically a more efficient mechanism than the traditional IPO process—in which investment bankers gauge demand through discussions with investors and set a price. Google arrived at its IPO price by aggregating the bids submitted by all investors who were willing to put their money where their mouths were. By gauging actual demand before the offering, a company using a Dutch auction shouldn’t leave money on the table, as so frequently happened in the 1990s. But the auction process, which worked pretty well, still has some inefficiencies built into it. Google’s auction produced a clearing price of $85. And yet the first trade yesterday was at $100, providing investors who bid shrewdly with an 18 percent pop. What’s more, yesterday some 22 million shares—more shares than were actually issued in the IPO—traded hands at an average price of about $100. So even though there were enough buyers willing to take the whole offering at $100, Google wound up accepting $85, leaving close to $300 million on the table. (Alternative explanation: Google engineered the IPO price downward to guarantee a healthy pop. See Henry Blodget’s thoughts on this in “Gambling on Google—The Thrilling Conclusion.”)
4. Strike a new blow for shareholder democracy. By skirting the traditional IPO apparatus and allowing small investors to bid for stock on the same terms as institutional investors, Google’s IPO was a radical experiment in shareholder democracy. But the company’s overall structure is fundamentally undemocratic. As the prospectus states, Google has two classes of common stock. Class A, the kind the public bought, carries one vote per share. But the Class B stock, mostly owned by executives, carries 10 votes per share. Founders Larry Page and Sergey Brin each own about 16 percent of the Class B total, giving them effective control of the company in near-perpetuity. This type of structure is common at family-owned media companies like the Washington Post, Dow Jones, and the New York Times Co. And it’s a recipe for management entrenchment. So far, Google’s management team has been exemplary. But the half-life of dot-com CEOs is remarkably short. On the Internet, this year’s surefire business model can be next year’s one-way ticket to Chapter 11. If Google’s executives stumble badly in the next few years but are intent on sticking around—Brin and Page are only in their 30s, after all—shareholders will have virtually no recourse but to sell.
