Google's lead investment banks--Morgan Stanley and Credit Suisse First Boston--have reportedly been building a system from scratch over recent months to accommodate the search giant's.
Download the S-1
Click here to download
Google's S-1 filing.
Caution: Large file.
Representatives from the two financial institutions, as well as Google, declined to comment on the underlying technology for delivering the IPO. But people familiar with Internet stock offerings said technology should pose few problems for the undertaking, even on such a vast scale.
"Ten years ago, a system crash would have been a real possibility. But in 2004, it's not as much of a problem," said Andrew Klein, founder of former Wit Capital, an investment bank that conducted electronic IPOs and is now owned by brokerage giant Charles Schwab.
Auctions, until recently eclipsed by uniform pricing, have come back in vogue thanks to powerful computers and the Internet, which together make it feasible to process thousands of transactions on the fly. E-commerce giant eBay offers the most obvious example, with revenue expected to break $3 billion this year. But auctions have gained traction in other arenas as well, including Google's own booming keyword advertising business--a system that has proven so successful that the company flagged it in explaining its decision to use an auction rather than traditional IPO methods.
"Our experience with auction-based advertising systems has been surprisingly helpful in the auction design process for the IPO," Google co-founder Larry Page wrote in a seven-page letter to investors that prefaced Thursday's IPO filing with the Securities and Exchange Commission.
Investment bankers, company executives and industry observers assert that advancements in technology--such as chips in the case of Moore's Law--mean that billion-dollar IPOs by auction are doable.
Klein pointed to Google's own ability to solve complex information retrieval problems and deliver quality search results as evidence of the advances.
"They have technology and experience to handle server loads and a platform to accommodate a large number of people on their Web site. Technology is not the problem in doing an IPO. The hard part is thinking through every step of the process," Klein said.
The IPObasically requires a Web site that feeds into a database to capture the bidding information. Bids are then cleared through a vetting process, and orders for IPO shares are booked. The information is then aggregated and algorithms are developed to review the bids, Klein said. Then software is written to apply mathematical computations to the bids to develop a list of winning bidders.
"Auction IPOs require far more operational and organizational structure than amassing servers and processing power," he noted.
Banks raise concerns
However, advances in technology haven't stopped the major investment banks from using technical concerns as a means to warn companies against using online IPO auctions, said Patrick Byrne, president of Overstock.com, an Internet retailer that issued its in 2002.
"Computationally, it's not a complex problem," said Byrne, who previously worked as a general partner at an investment company. "But the traditional banks tried to raise concerns in my mind. That was a completely spurious thing. This was not computationally intensive. It could be done on an Excel spreadsheet. There was no technology risk whatsoever."
Web search king
plans to raise $2.7 billion
Banks could be motivated to oppose such deals because they stand to get lower fees for managing auctions compared with traditional IPOs. Typically underwriters net about 7 percent of the value of the offering, but it has been rumored that Google is insisting on a lower percentage take, given the $2.7 billion IPO price.
Auctions also prevent banks from arranging to cut in customers for IPO shares as a reward for business. Allegations of wrongdoing in IPO allocations have dogged Wall Street since the dot-com bubble burst. Google's own IPO filing came as a retrial got under way in the case of former Credit Suisse First Boston star Frank Quattrone, who stands accused of ordering the destruction of e-mails in the midst of an investigation into alleged IPO back-scratching at the investment bank.
Morgan Stanley and Credit Suisse First Boston are unfamiliar with IPO auctions, and were likely forced to play Google's game to be considered for the deal. Now that the company has made its bet, however, those same banks will be highly motivated to make the process run smoothly.
"I'm sure Google got advice to do things the way they're always done," said Peter Astiz, chair of the corporate securities group at national technology law firm Gray Cary. "But I'm also quite certain that they had the leverage to say, 'You'll do it our way or we'll go somewhere else.'"