In a filing with the Securities and Exchange Commission on Thursday, Google outlined how prospective investors can participate in the IPO process and offered tips to avoid disqualification. Given the expected strong demand for the shares, investors are likely to heed such advice.
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Among other things, Google issued a firm warning to speculators hoping to make a buck by quickly flipping their shares, a hallmark of many hot technology IPOs in the past. Instead, Google hopes to place its shares in a way that avoids the typical investment banking strategy of intentional underpricing--and the volatility that frequently follows.
"Our goal is to have an efficient market price--a rational price set by informed buyers and sellers--for our shares at the IPO and afterward," the filing states. "Our goal is to achieve a relatively stable price in the days following the IPO and that buyers and sellers receive a fair price at the IPO."
So, how does one get from point A to B?
First, interested investors need to have an account with one of the underwriters, Morgan Stanley or Credit Suisse First Boston, where they must submit a bid with the number of shares desired and price they are willing to pay.
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"As part of this auction process, we are attempting to assess the market demand for our Class A common stock and to set the size of the offering and the initial offering price to meet that demand," the founders state in the SEC filing. "Buyers hoping to capture profits shortly after our Class A common stock begins trading may be disappointed."
After Morgan Stanley and Credit Suisse notify bidders of the auction's close, the bids will be reviewed by the company and its bankers. The highest bids that clear the number of shares being offered in total will receive an allotment of IPO shares.
Let's say Google wanted to sell 100 million shares at between $26 and $28 per share. The highest bids totaling 100 million shares would get in on the offering, sold to everyone at the lowest qualifying price, also known as the "clearing price." For example, if three investors offered to buy 50 million shares apiece at $26, $27 and $28 a share, the last two investors might be invited to purchase shares at the clearing price of $27, while the first would be shut out.
Google's auction is likely to draw in thousands of bidders, and the lowest qualifying price could easily bring in well over the 100 million shares used in the above example.
To address that problem, Google's underwriters can choose between one of two allocation methods to determine how the shares would be doled out to the successful bidders.
One method would be prorated, ensuring each investor received a certain percentage of their requested allotment. The other method would simply give each successful investor the opportunity to buy the same number of shares, no matter how many they had originally requested.