NEW YORK - Google’s initial public stock offering has become a lot of work for relatively little return for Wall Street’s brokerage houses, leaving many of them grumbling about an IPO which they still feel they must participate in because of the prestige at stake.
The $2.7 billion offering for online search engine Google promises to make the biggest IPO splash yet in the post-dot-com era, and 30 brokerage houses have teamed up to facilitate the online public auction the company plans to set its offering price.
The auction system, a rare occurrence on Wall Street, is considered more egalitarian than the traditional IPO, which is heavily managed by brokerage firms and favors larger investors. It’s also much less lucrative for the big brokerage firms, which can make tens or hundreds of millions of dollars from a traditional IPO.
And that has Wall Street investment houses grumbling. The online auction system, while not involving new technologies, does require a great deal of work to link the 30 underwriters to each other and to Google’s central order book. While the firms are not commenting on the work, or the costs involved, sources speaking on condition of anonymity told The Associated Press that the costs far outstrip those of a traditional IPO, while the fees and investment returns will be far less.
Indeed, one of Wall Street’s biggest brokerage houses, Merrill Lynch, pulled out of the underwriting consortium. While the firm won’t officially comment on its decision, a source close to the firm, speaking on condition of anonymity, said the profits would not be worth the costs of working on the auction system, especially given the volume of bids Merrill Lynch expected.
‘‘It wasn’t the complexity, it was the cost,’’ the source said.
While no other firms have dropped out of the Google IPO, a number of investment firms have been quietly complaining about the poor margins on the deal. The firms will not officially comment on the IPO due to Google’s strict non-disclosure agreement, required of all underwriters.
‘‘It’s hard to tell how much the underwriters are going to be beating down on the underwriting spreads, but they will take a hit somewhat,’’ said Jeremy Dickens, an attorney with Weil, Gotshal & Manges in London who has advised numerous companies on IPOs. ‘‘I think people are getting a little concerned about it, and it doesn’t really surprise me that people are taking shots at it.’’
The technology involved in the auction system has been a particular sore point for many firms, especially the smaller investment houses that have had to upgrade their own computer systems to meet Google’s stringent security and technology requirements. That has led some firms to leak reports to the media that the computer system could be compromised by computer hackers.
Yet the firms agree that no new technology is needed, and despite Google’s aggressive timetable in setting up the auction network, it is unlikely that the IPO process will be hacked given Wall Street’s record of impeccable computer security. One banker close to the Google IPO, who spoke on condition of anonymity, told the AP, ‘‘We certainly know something about keeping transactions secure. We do it every day.’’
Many of the complaints result from the timetable Google has demanded of its Wall Street partners, a number of sources told the AP. With a target date of July 16 for full system testing, the 30 underwriters who will be allowing bids on Google stock must get the computer systems up and running in a very short period of time.
Technicians are working to link the 30 separate brokerage houses and Google itself to a master order book. This master system will allow all the underwriters to track the latest bids for Google’s IPO price in real time, and each underwriter must allow would-be bidders to make bids via telephone, the Internet, fax or in person. And all of these connections must be secure.
While those involved in the IPO agree that the technology isn’t new or overly complex, some firms have had to hire additional consultants and buy software and systems to get it done on time, sources told The AP.
A few have even asked for additional time to get their systems checked and ready, sources said.
‘‘Certainly, for the smaller brokerage houses involved, they may have to spend far more to upgrade their systems than a Morgan Stanley or Credit Suisse First Boston,’’ one banker involved in the IPO said, naming the two lead underwriters for Google’s IPO. ‘‘They may feel underprepared and genuinely concerned about hackers.’’