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Last Updated: Friday, 30 April, 2004, 18:50 GMT 19:50 UK
Wall Street cool on Google plans
Google headquarters
Google insists its auction method is both fair and prudent
Google's choice of an unorthodox way of floating its shares has raised eyebrows in the financial world.

The internet giant, which insists it will remain "not a conventional company", is to sell shares via an online auction.

The process is cheaper - and, Google hopes, more democratic - than the traditional investment bank-led deal.

But experts are questioning whether it makes sense either for Google, or for its future shareholders.

Bankers' bill

Selling shares online may save Google money, but costs will still be high.

TOP SEARCH PROVIDERS IN US
Graphic showing penetration of Google search engine technology
Share of searches
1. Google: 49.7%
2. Yahoo: 45.4%
3. Mix: 2.3%
4. Ask: 1.9%
5. Other: 0.7%
According to data firm Thomson Financial, underwriting fees for the deal are likely to be $81m (46m), making Google the most expensive technology initial public offering (IPO) ever.

Although shunning the traditional Wall Street route, Google has nonetheless hired top-name banks CSFB and Morgan Stanley.

The cost, although high, is still some way off the $263m paid for the IPO of AT&T Wireless in 2000.

And the Thomson figure is predicated on raising the highest possible amount, some $2.7bn.

Out on a limb

There have also been concerns over Google's precise methodology.

The company plans to use a so-called Dutch auction, a sales method where the price drops until bidders are ready to pay.

Dutch auctions have been used in IPOs chiefly by internet companies during the late-1990s boom, and are regarded with some mistrust by mainstream financiers.

The mechanism was responsible for some of the least successful IPOs of the period, such as online magazine Salon.

Dutch auctions and other supposedly open IPO forms are blamed for the extraordinary price swings seen in the early days after some high-profile flotations.

Some analysts say they also tend to underprice shares, leading to insufficient returns for the issuer.

Dutch disease

The mechanism is also seen as potentially confusing for investors.

Wall Street
Wall Street has never accepted the auction idea as worthwhile
The Dutch auction establishes a clearing price, the highest price at which all shares would be sold. Anyone bidding below that price loses out; anyone bidding at or above it is successful, and pays the clearing price.

In theory, there may well be more successful bids than there are shares available, so shares will have to be allocated according to complex and still undecided formulae.

Bidders will have to work out a price without knowing exactly how many shares are on offer, since Google reserves the right to increase the size of the IPO.

High hopes

Google argues that the peculiarities of its system are a reaction to the excesses of Wall Street in recent years.

By minimising the role of brokerage houses, the sale avoids the charge commonly attached to IPOs, that favoured clients are awarded shares on special terms.

And although most previous auction-type IPOs have been failures, the Google sale is on a far larger scale, and could be a means of proving the scheme works, optimists say.

"This... could create credibility for a whole new generation of IPO auctions," said Benjamin Howe of investment bank America's Growth Capital.

Some analysts have seen the Google flotation as a sign that the hi-tech prosperity of the mid-1990s could be about to return.


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