just procrastinating

Wednesday, May 05, 2004

Google IPO and IB
Here is an interesting article by Seth Goldstein that touches on some of the feeling I have about investment banking. It refers to the Google IPO which is being done as a auction, thereby squeezing the bankers out of difference between the price that they set and any subsequent upward movement the first day:
Google's IPO is above all a capital performance. Its offering memo describes a set of rules that at once promise zero short term accountability on behalf of management while at the same time promise unparalleled tick-by-tick efficiency in terms of equity pricing.

On Friday, Tina and I got together with some friends for dinner. One of the husbands works for CSFB and I congratulated him on the coup of being named the lead on the Google IPO. Whereas I expected a little gloating, instead he bit his tongue and complained about the greed of Google and how little money CSFB was going to make (including its not insignificant banking fees). I think the point he was trying to make was that by going the way of the auction, that Google was trying to take every single penny off the table that they can. Seeing his genuine anger, I didn't have the heart to remind him that this was a good thing overall, namely that companies were going to start to benefit fully from the intersection of buyers and sellers of their stock, not the marketmakers per se.

Instead what I saw was the end of a certain kind of investment banking innocence. No, the outsized commissions are not your divine right. No, you can't control the allocation of underpriced shares to your best clients. Yes, you will be paid, but it will be in fees like those paid to lawyers, consultants or accountants. Profiting from outsized bid-ask spreads will need to be replaced by a different type of value. I am not sure Wall Street has figured out what it will do if Google's auction model proves to become the rule rather than the exception.
I assume that CSFB still gets their 7%, but it might only be a matter of time before that goes as well.

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