Seth Goldstein wonders if Google will do what Hambrecht failed to do to IPO commissions:
Posted by DeLong at May 3, 2004 07:06 PM | TrackBack | | Other weblogs commenting on this postTransparent Bundles: Google vs Wall Street: One of the husbands works for CSFB and I congratulated him on the coup of being named the lead on the Google IPO. Whereas I expected a little gloating, instead he bit his tongue and complained about the greed of Google and how little money CSFB was going to make (including its not insignificant banking fees). I think the point he was trying to make was that by going the way of the auction, that Google was trying to take every single penny off the table that they can. Seeing his genuine anger, I didn't have the heart to remind him that this was a good thin overall, namely that companies were going to start to benefit fully from the intersection of buyers and sellers of their stock, not the marketmakers per se.
Instead what I saw was the end of a certain kind of investment banking innocence. No, the outsized commissions are not your divine right. No, you can't control the allocation of underpriced shares to your best clients. Yes you will be paid, but it will be in fees like those paid to lawyers, consultants or accountants. Profiting off of outsized bid-ask spreads would have to be replaced by a different type of value. I am not sure Wall Street has figured out what it will do if Google's auction model proves to become the rule rather than the exception from here on in...
I was kinda wondering just what CSFB and Morgan Stanley were gonna get out of "handling" this deal, since it's going the auction route. Even more, I was wondering what they were gonna do to "earn" what they were going to charge.
Posted by: Linkmeister on May 3, 2004 07:10 PMThe S-1 doesn't have its fees section filled out, unless I missed something. When it does, you can look up how much the underwriters got paid there. For their payday, the investment bankers will provide some real services. Dutch auction or no, MS and CSFB will get those shares to the public, and ease those shares onto the exchange.
Posted by: wcw on May 3, 2004 07:36 PMFlipping IPOs was one of the worse abuses of the bubble.
Going the auction route is so much better.
I keep wondering why no one sued some of the
investment banks for pricing IPOs so low and leaving so much money on the table.
My heart goes out the the poor investment bankers. How could Google be so greedy?
Posted by: Kuas on May 4, 2004 08:09 AMAmid all the praise of the Google auction and how it supposedly helps the little guy investor, I've seen very little mention of the device it uses that insiders and management have so long used to abuse outsiders and little guy investors. But here was one...
~~~
Google this before you think about buying a single share of Wall Street's most-hyped IPO in years. Just type in "shareholder rights" and hit return.
What you'll find at the top of your Google search is a link to the Investopedia, an online investment primer. At the top of its list of what shareholders should know in order to protect their rights is the "pecking order" of their stock in the corporate hierarchy...
It's Investing 101. Dual classes of stock with supervoting rights for just one class put small investors at a big disadvantage.
That is one reason why Google's IPO filing on last week was so astounding.
The company's founders, who have spent so much time grandstanding about their desire to auction, rather than distribute, their new Google shares, decided on a stock structure that puts the little guy at the back of the line.
It's all spelled out in a gimmicky letter entitled "Owner's Manual," filed along with details of it's $2.7 billion IPO.
Google founders Larry Page and Sergey Brin lament the fact that "public ownership may jeopardize the independence and focused objectivity that have been most important in Google's past success."
As a result, the letter goes on to say, Google needs to have a "dual-class structure in which the founders will hold a higher-vote class of stock that will allow them to control much of the company's fate."
Got that, prospective Google buyers?
The company's founders will take your money, allowing them to cash in some of their chips, but they won't trust you to vote in the best interest of your company or your investment...
Much ink will be spilled extolling the virtues of Google's planned auction of its shares.
But how important is it to democratize the IPO process if the resulting public company isn't democratic at all?
Google and it's high-priced advisers at CSFB and Morgan Stanley had a chance to show that Wall Street had reformed its ways in the wake of the IPO scandal that ensnarled most big firms on the street.
But no, it's business as usual. The biggest, boldest and glitziest deal of the new millennium will shower riches on the company's founders and bankers.
Once again, they'll all be glad to take your money - just don't ask any questions, please.
http://www.nypost.com/seven/05022004/business/23456.htm
I'd rather the guys with some clue what they are doing retain control. What was the last "great" company which wasn't controlled by the founder or founders during its rise to power? IBM?
Fortune's most admired list came out this week. Top firms? Wal-Mart and Berkshire-Hathaway. "Grown" by their owner-leaders. McDonalds was run by the founder during its rise to greatness. HP started tottering once the founders were no longer in control. Ford became great under Fords. Microsoft and Dell, the dominant players in software and PCs, founder-controlled. Founders create value.
The problems come when management and the board are not long-term owners. Option-holders who can sell out at a moment's notice and have huge golden parachutes anyway, mutual fund managers with no direct exposure - they do relatively poorly as managers. Actual owners who own large chunks of the company, AND who's net worth is essentially determined by the long-run performance of the company - these are the folks who should control. It looks to me like Google is trying to keep those folks in charge.
Posted by: rvman on May 4, 2004 08:32 AMJim Glass writes:
>
> Google founders Larry Page and Sergey Brin lament the fact
> that "public ownership may jeopardize the independence and
> focused objectivity that have been most important in Google's
> past success."
>
> As a result, the letter goes on to say, Google needs to have a
> "dual-class structure in which the founders will hold a higher-
> vote class of stock that will allow them to control much of the
> company's fate."
>
> Got that, prospective Google buyers?
I'm not a prospective Google buyer, but I am a bit familiar with dual-class structures. Ford has a sucky one, for example. That said, I can't honestly say that I feel fully enfranchised as an ordinary stockholder in any other company I own shares in. To a first approximation, *all* the directors are selected by management without any contested seats, and such directors have zero independence. *Every* stockholder-proposed proxy item is recommended against. Unless a corporate raider or a huge institutional investor like CALPERS gets pissed off by management, your voting rights are fairly meaningless.
This is not to say that being a Google shareholder would be much (or any) better, but at least it is completely clear who is really calling the shots. For that matter, this arrangement probably makes it less likely that the founders or upper management will try a "dump and run" move with their shares. I have seen many worse situations out there. The problem I see with the Google situation is that the shares are likely to be extremely expensive relative to any market metric you can come up with. I think the strongest argument for believing that Google is worth a ton of money more than you might think is that they have truly mastered the art of the Incredibly Vast Data Center, and thus might be able to play the role of file server for all (not just web-searching and email). But that's not the easiest goal to reach, even if you are Google.
Posted by: Jonathan King on May 4, 2004 08:54 AMCould someone explain the "Hambrecht" reference
Posted by: Matthew Saroff on May 4, 2004 09:01 AMGoogle can do it because they are so well known and everyone wants their shares. The "Google model" wont work with IPO's for companies nobody has heard of. In those cases, the people doing the IPO need the investment banks' network of investors who will buy whatever stock the bank tells them to buy. Back in the 90's when even my dog could have sold an internet startup this was perhaps less of a concern and pure greed had freer reign. But now that folks have been seriously burned, they will want an investment banks' approval of the value of the shares on offer unless it is something as well known as Google.
Posted by: steven kyle on May 4, 2004 09:19 AMSteven Kyle is absolutely right that Google's founders are using the firm's reputation, and the huge demand for shares that results from that reputation, as leverage to structure the IPO on the terms that are most advantageous to them. They are only able to do this because I-Banks are falling all over each other to do the IPO.
Founders will unambiguously prefer the dutch auction IPO to the traditional IPO, because it guarantees that they will receive the highest price for any shares they choose to sell. However, I-Banks will prefer the traditional format because it keeps their commission paying customers happy. Firm's facing slack demand for their IPOs will be forced to issue on the bankers' terms. What's interesting is that this creates a niche demand for I-Banking firms that only issue via auction, which is the market that Hambrecht hoped to dominate in the late 90s.
Following this argument, the question of IPO format becomes a function of the amount of money the founders hope to raise, as well as the demand for their shares. Founders doing small issues will gotoHambrecht-style banks. Founders doing large issues would like to go to the botiques, but will be forced to deal with the bulge bracket if they really want to move size. Google is able to get around this problem because of the runaway demand for its shares.
Posted by: Richard on May 4, 2004 11:43 AMGoogle Founders just want a taste of the late 90's which they missed by not doing their IPO way back then. As for dual shareholder- you can buy and sell in less than a minutes, they are in for most of the working lives....unless they want to pull a Paul Allen or a Woz...
Posted by: Allen M on May 4, 2004 02:45 PMMatthew, Google "Hambrecht and Quist." Big Silicon Valley investment bank.
Posted by: Linkmeister on May 4, 2004 04:11 PM"Pension funds from New York to California may boycott the Google stock offering when shares go on sale this summer, citing the founders' lopsided control of super-voting shares.
"The Class A stock will be sold directly to the public, while another class, Class B, will be sold exclusively to Google's insiders, led by founders Larry Page and Sergey Brin -- a move that gives them 10 votes for every single vote by ordinary stockholders.
"New York teachers' $300 billion pension fund, TIAA-CREF, wants the stock to be priced lower, at a discount that reflects the diluted voting power.
"California's pension group, CalPERS, says that in the past it has teamed with pension funds in New York, New Jersey and Connecticut to block dual-class stock, citing a Marriott dual-class plan it helped shoot down.
"'Most public pensions agree in principle that the dual-class stock structure is unfair to shareholders,' CalPERS spokesman Brad Pacheco told The Post..."
http://www.nypost.com/business/20166.htm
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