The struggle behind the scenes of the Google IPO reminds me, again, how difficult it is to change the way that business operates. This is even more evident in the securities industry where a handful of players have a tremendous amount of market power that equates to hard dollars.
For those of you that have not been following the saga, Google's IPO is based on an auction concept called Dutch auction. You eBay'ers will recognize the term, you have x number of something to sell, a bunch of bidders bid up the price until the auction closes, at which time the price is set to the highest bid and the number of items are sold to however many bidders will consume x number of items. The trick for the bidders is to not bid up to dramatically, you really only want to be incrementally higher than the bidder below you, else the group as a whole ends up paying too much. This is actually very similar to John Nash's market equilibrium concept loosely based on the observation that if we all just do what best for us as individuals then the group as a whole will lose.
Investment banks have balked at the entire concept of using auctions for IPOs since the beginning of time. Why would they support auctions when the standard process involves them setting a price that benefits the seller, but also rewards their inner circle of clients with stock that they can flip for a tidy profit? The auction process democratizes the act of taking a company public, all buyers have equal power and no single entity can bestow a preference on anyone.
But the investment banks have a point in suggesting that the auction process creates a vulnerability for stock in that the price set for the first stick of stock to get sold represents the high water mark and there's nowhere to go but down. With a stock as hot as Google, it's hard to imagine that it would be anything but stable in trading under any circumstances. It also sounds like the bankers are saying that this stock can't possibly trade on the fundamentals of the company, so let's trade on market dynamics... it's kind of like that saying about the legal system, "if you are right on the facts then argue the facts, but if you are wrong on the facts then argue the law".
At any rate, the current system of stock offerings is also pretty well flawed in that good companies leave a lot of money on the table, money that gets picked up by the investment banks and their clients. If you are in the inner circle, then you probably don't want much to change, but I don't think that is long term healthy for our market system. Straight up auctions are also now viable for every stock considering that a company is restricted from actively selling themselves in the quiet period, and absent of any incentives for the investment banks it is hard to imagine a concerted effort on their part to underwrite an offering. So ultimately we need something in the middle that provides healthy incentives for underwriters and institutional buyers, yet is fully open and transparent to the retail investor.
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