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Wall Street fit to be tied over Google IPO

By MICHAEL J. MARTINEZ
The Associated Press

BEN MARGOT / AP Google co-founders Larry Page, bottom, and Sergey Brin playfully pose earlier this year at the Internet search engine's headquarters in Mountain View, Calif. Google's IPO auction means lots of work for little return for big brokerages, but most still want the prestige of underwriting the much-anticipated IPO.

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The $2.7 billion offering for the online search engine promises to make the biggest IPO splash yet in the post-dot-com era, and 30 brokerage houses have teamed up to help the online public auction Google plans to set its offering price.

The auction system, a rarity on Wall Street, is considered more egalitarian than the traditional IPO, which is heavily managed by brokerage firms and favors larger investors.

It's also much less lucrative for the big firms, which can make tens or hundreds of millions of dollars from a traditional IPO.

That has Wall Street investment houses grumbling. The online auction system, while not involving new technologies, does require a great deal of work to link the 30 underwriters to each other and to Google's central order book.

While the firms are not commenting on the work or the expenses involved, sources speaking on condition of anonymity told The Associated Press the costs far outstrip those of a traditional IPO, while the fees and investment returns will be far less.

Indeed, one of Wall Street's biggest brokerage houses, Merrill Lynch, pulled out of the underwriting consortium.

While the firm won't officially comment on its decision, a source close to Merrill, speaking on condition of anonymity, said the profits would not be worth the expense of working on the auction system, especially given the volume of bids Merrill Lynch expected.

"It wasn't the complexity, it was the cost," the source said.

No other firms have dropped out of the Google IPO, which is several months away. But a number of investment firms have been quietly complaining about the poor margins on the deal.

They will not officially comment due to Google's strict nondisclosure agreement, required of all underwriters.
 
The technology involved in the auction system has been a particular sore point, especially for the smaller investment houses that have had to upgrade their own computer systems to meet Google's stringent security and technology requirements.

That has led some to leak reports to the media that the computer system could be compromised by computer hackers.

Yet the firms agree that no new technology is needed and that despite Google's aggressive timetable in setting up the auction network, it is unlikely the IPO will be hacked given Wall Street's record of impeccable computer security.

One banker close to the Google IPO, who spoke on condition of anonymity, said, "We certainly know something about keeping transactions secure. We do it every day."

Many of the complaints result from the timetable Google has demanded of its Wall Street partners, a number of sources said. With a target date of July 16 for full system testing, the 30 underwriters that will be allowing bids on Google stock must get the computer systems up and running in a very short time.

The auction system means there's a good chance that Google's target price will be higher than an underwriter would have set.

And that means less money for Wall Street firms and institutional investors who buy at the target price and hope for a major push once the stock begins trading.

"Back in the dot-com era, a lot of companies were angry when their target price would be set at, let's say, $12, and then it rose to $50 or $100 on the first day. They left a lot of money on the table," said Anthony Pergola, corporate partner at Lowenstein Sandler and a specialist in IPOs.

"With the auction system setting the price, it's the company that's going to benefit from whatever market hysteria there is, not the friends and family of the directors and not the underwriters who were paid in stock," Pergola said.

However, investor interest in Google is such that the vast majority of underwriters believe they have no choice but to offer their investors a chance to bid.

"They can at least write it off as a marketing expense," Pergola said.

"You definitely want to be on the cover of that prospectus."