The Syndicate podcast, episode one: Google's revolutionary IPO auction

5 min read
Gareth Gore

In July 2004, Google quietly switched on a new part of its website. Despite being just a few years old, the search engine was the most visited place on the world wide web. After conquering the world of search, edging out rivals such as MSN, AOL and Yahoo, the company’s founders Larry Page and Sergey Brin had already expanded into news, online shopping and email.

The new section of the website was something completely different. It was an invitation to buy a piece of the company. The switch-on marked the official launch of the Google IPO which, at up to US$4bn, would be the biggest technology listing in years. But Page and Brin, ever the disruptors, had much bigger ambitions: they wanted to revolutionise the way companies go public.

“Google is not a conventional company. We do not intend to become one,” the founders wrote in a letter to potential shareholders, which they titled “An Owner’s Manual for Google’s Shareholders”. Page and Brin disliked the conventional IPO process, which they felt too often resulted in a first-day pop that enriched big investors and the underwriting banks – at the cost of the company itself.

“It is important to us to have a fair process for our IPO that is inclusive of both small and large investors,” they wrote. “Many companies going public have suffered from unreasonable speculation, small initial share float, and stock price volatility that hurt them and their investors in the long run. We believe that our auction-based IPO will minimise these problems.”

Page and Brin were taking aim at Wall Street at a time when public opinion of investment banks was at an all-time low (the 2008 crash would of course see it sink even lower). Just three months before the switch-on, the big banks had paid US$1.4bn to settle allegations that they pumped out research – mainly about technology stocks – that wasn’t true just to win business.

This episode of The Syndicate tells the story of how Google tried – and failed – to take on Wall Street. It’s the story of how the search engine championed the Dutch auction, a technology that was hundreds of years old, as a way of democratising the IPO process. But it’s also the story of how it was met with resistance and how its efforts (at least in the short term) failed.

The deal almost never happened. Just days after switching on the new part of the website and inviting its users to start submitting bids, a blow came from an unlikely place. Playboy published an interview it had done months earlier with Page and Brin. Regulators said the interview contained material information to the offering and threatened to cancel the entire deal.

It was just the first in a series of hurdles for Google. The auction created big problems for many potential investors. Some simply couldn’t get registered to make a bid through their brokers. Others – especially the big asset managers – didn’t have a clue what strategy to use, to bid high or low, big or small. There were even rumours of banks telling investors to bid low.

Within just a few days of the launch, it was becoming clear to Credit Suisse First Boston and Morgan Stanley – the two main banks on the deal – that the clearing price would be nowhere near the US$108–$135 per share range they had put out. They were forced to modify the official IPO filing to say the expected range would be US$85–$95 a share.

What had been the most anticipated listing in years was quickly becoming a flop. When the deal eventually priced at the bottom of the range, people were quick to point the finger at Google and its auction. There was a good deal of Schadenfreude on Wall Street. Why had the company decided to ignore the advice of the banks? Why had they snubbed the tried-and-tested IPO method?

Others suspected sabotage, and said they saw people – even people on the deal – try to torpedo the auction. If Google had been successful, Wall Street might have lost one of its more lucrative business lines. “There were definitely people trying to sabotage the deal … we know there were people trying to sabotage the deal,” Lise Buyer, who oversaw the IPO for Google, says in the episode.

While the auction inspired a handful of other deals, including one in Egypt, the disappointment of the Google IPO means that most people steered clear of it for many years. But today, almost 20 years on, there are signs that things are beginning to change. While Wall Street has tweaked the process to give them more power over pricing and allocation, companies such as Unity Software and AirBnB, have chosen the auction to go public.

To hear this episode – and more like it – for free and in full, click one of the links below.