Postscript on Google

Postscript on Google: what happened?
Paul Klemperer, September 2004

Google did some good things to mitigate the winners’ curse – it rewrote its SEC (S1) filing to say more about the problem, it initially set a 3-digit stock price to deter the most naïve investors, and its brokers’ rules for opening accounts to bid made it quite hard for unsophisticated investors to compete.

But Google then badly botched the auction mechanics, and seems to have created the opposite problem of deterring serious investors: its possible violations of SEC rules, including its infamous Playboy interview¹ and an apparent failure to register several million employee shares (or to report this failure),² its poor “roadshow” and general lack of transparency,³ its difficulties with the systems development⁴ and delay in filing the prospectus,⁵ and the fact that different brokers offered very different rules and bidding conditions, all deterred investors⁶. So did the very stringent requirements on who was permitted to bid – some experienced, sophisticated, and liquid investors were rejected by more than one broker.

Perhaps most damaging, neither private investors nor institutions who had stayed out of the auction process at Google’s original price range of $108 to $135 could rejoin the bidding when the range was cut to $85 to $95.⁷ Almost as many shares changed hands the day after the IPO, when prices were between $97 and $104, as were sold in the IPO at the $85 IPO price. So lack of attention to detail meant the auction raised less than it could have.

However, we shouldn’t be too critical: even after all its mistakes, and though not as successful as it should have been, Google has done no worse than a typical Wall Street IPO, and for lower fees.⁸ Hopefully it will encourage more auction IPOs in the future.

For more articles on Google, and on auctions, see http://www.paulklemperer.org

1. After a company files its S-1document to go public, it enters a “quiet period” during which it can only release information relevant to investors through a further formal filing. Although Google’s founders gave their Playboy interview prior to filing their initial S-1, the interview was actually published (and thus the information released) during the quiet period. (Google resolved the SEC’s concerns by adding the full text of the interview as an appendix to its S-1 to ensure that any material information was conveyed via the appropriate medium.) Back to top

2. If these issues also meant Google was so afraid of a law suit (in the contingency that the price fell after trading began) that it felt it had to ration to ensure a first-day price rise, then these issues were very costly to Google. The decision to ration bidders to only 74.2% of their bids, at a price equal to the very bottom of the price range was surprising (though it might possibly have been forced on Google if a large volume was bid for at 85). Back to top

3. Information is key not just to preventing the winner’s curse, but also to allaying the fears of those who are concerned about the winner’s curse. If people are aware of the curse (after all the publicity!), and are afraid of falling victim to it, then revealing more information alleviates their concerns and generally both raises demand (and the final auction price) and reduces the randomness of the final price. Some described the road show as unprofessional. Certainly, Google’s “just trust us” attitude was not helpful to people trying to work out how to bid in an auction. Back to top

4. New systems had to be put in place, and coordinated across firms – initial indications were that the systems would be ready by early July but there was then a nearly two-week delay. Back to top

5. Investors complained that the initial filings lacked key information. Instead of the usual 60-90 days, it took 111 days from the initial S-1 filing (April 30) to the IPO (Aug 19). Back to top

6. The intellectual property settlement with Yahoo also generated bad publicity. Back to top

7. Google required all bidders to obtain a unique ID# from Google’s IPO website, but the deadline for obtaining an ID was Fri Aug 13, when the indicated price range was still $108-135. The range was cut to $85-95 only on Wed Aug 18 – and there are stories of institutional investors who weren't able to get bidder IDs after the price range got cut. So there may have been significant institutional demand in the $85-108 range that did not get to participate in the auction. Back to top

8. The fees were reported as just 2.8%, versus fees of approximately 4% for similarly-sized recent deals, for savings of approximately $20mm based on the $1.67bn IPO. (For smaller IPOs, fees are typically 7%.) Back to top