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Merrill Lynch Pulls Out of Upcoming Google IPO

Posted on: Tuesday, 22 June 2004, 06:00 CDT

NEW YORK (AP) -- Merrill Lynch & Co. (MTDB), the nation's largest retail brokerage, dropped out of the list of underwriters taking part in the upcoming $2.7 billion initial public offering of Google Inc., mostly out of concern that the fees it would generate wouldn't be worth it.

Early Monday, Google, the Internet search engine based in Mountain View, Calif., disclosed that Merrill Lynch wouldn't be one of the firms that would allow clients to bid for shares in Google's initial public offering, which is being led by Morgan Stanley and Credit Suisse First Boston.

It was Merrill Lynch that decided to take a pass, according to people familiar with the syndicate put together to sell the shares, because of the amount of money Merrill Lynch stood to take in from customers who were awarded allocations.

"The fees are too thin," said one institutional investor who is a client of Merrill Lynch and other firms planning to sell shares in the deal. "It wasn't worth the trouble."

A Merrill Lynch spokeswoman declined comment.

Underwriters who don't get the coveted lead role in an IPO often settle for far less in fees than other banks.

Typically, companies going public pay about 7 percent of the size of the offering in fees, and most of that goes to the lead underwriters. Other firms in the syndicate of banks get less in fees, but also distribute fewer shares.

Google's IPO, though, is anything but conventional. The company has insisted on an auction-style sale for its shares, and, though fees haven't been disclosed, they're likely to be low even for the lead underwriters, let alone those lower down the list of bankers.

Instead of a 7 percent fee, some bankers believe the total fee could be around 3 percent.

What's more, other firms involved in the deal could, in theory, handle the sale of more shares than the lead underwriters if a lower-level firm's clients bid at the right price and right size to win shares.

That could mean those lower-tier firms are handling more of the risk in placing the shares and paying more of the administrative costs of handling the offering, and getting paid less than other firms.

It has made some firms involved in the deal uneasy. Merrill Lynch, for instance, wasn't comfortable with the idea of an auction to begin with, according to people familiar with the IPO, but the draw to be a part of what is hands-down the highest-profile stock offering of the year was enough to keep them in the mix.

In fact, some banks have referred to the IPO as a "loss leader," basically saying they're willing to make little - or even potentially lose money - just to be able to tell their clients they are involved.

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