Google’s IPO and Banking Fees

Bloomberg said today that Google had chosen the underwriters for its upcoming initial public offering. It chose the two blue-bloods of such things, Morgan Stanley and Goldman Sachs, to do the issue (likely this coming April).

But most people are focusing on the wrong numbers. They are fixating on the post-IPO market valuation that Google will obtain, something on the order of $15 billion would be a good guess, which is not bad, considering the search company’s reputed $1 billion in sales. Similarly, people are fascinated that Sergey and Larry will be paper billionaires.

The more interesting number, at least to me, is a much-smaller one: $280mm. That is how much in fees Google’s IPO will earn investment bankers at Morgan and Goldman.

The figure is 7% of the offering, which is typical for such things; but it is remarkably large for the minimal service Google’s investment bankers need provide. After all, be serious: no road show is required, no marketing need be done, and investment bankers can pretty much pick a price and investors wil pay it. It is, truly, money for nothing.

It is a reminder how screwy (read: broken) the stock issuance game remains. It is perverse and indefensible that underwriting fees are 0.9% for corporate bonds, about 0.3% for mergers & acquisitions advice — and a whopping 7% to play midwife for a company whose stock could be randomly dropped from airplanes and still hit interested buyers.