April 30 (Bloomberg) -- Google Inc.'s initial public offering will be a $2.7 billion experiment.

Instead of channeling shares to institutional investors through investment bankers, Google hired Morgan Stanley and Credit Suisse First Boston to run an offering that gives people an opportunity to bid by phone, fax or the Internet. It's the biggest test of a system pioneered by San Francisco investment banker William Hambrecht in 1999.

``I have been on Wall Street for 27 years, and I don't ever remember this kind of situation,'' said Marc Klee, co-manager of the $500 million John Hancock Technology Fund. ``Smaller investors are more likely to get filled.''

Proponents say the so-called Dutch auction being used by Google, which runs the world's most-used Internet search engine, will replace a process that led to soaring prices as shares debuted during the Internet boom of the 1990s. Regulators say institutions made side deals with bankers to ensure they got allocations of popular IPOs, which they quickly sold, capturing quick profits.

CSFB and Morgan Stanley are two of the 10 Wall Street firms that were penalized by regulators in 2003 for, among other things, violating disclosure rules in underwriting stock sales. Hambrecht's company, WR Hambrecht + Co., isn't involved in the IPO.

`Fair Method'

CSFB also paid $100 million in 2002 to settle regulatory charges that it allotted IPO shares in exchange for higher commissions. The banks' fees from the Google sale may be less than $100 million, because the Internet auction generates smaller fees than the 4 percent paid in IPOs of similar size.

``It's going to demonstrate that there is a fair method of allocating share that bypasses the whole insider game,'' said Philip Phan, a finance professor at Rensselaer Polytechnic Institute and consultant to the World Bank.

Pen Pendleton, a spokesman at CSFB, and Melissa Stonberg, a Morgan Stanley spokeswoman declined comment.

The IPO differs from previous sales by giving individual investors the chance to enter their own estimates of each share's value, within a range set by Google. Only after they have entered their bids, initially through accounts at CSFB and Morgan Stanley, will Google and its bankers determine the price.

A Dutch auction, named for a practice used by flower-sellers in the Netherlands, is a conventional auction turned inside out. Bidders, instead of offering higher prices to top rivals, must make offers without knowing what others are offering. The final, or clearing price, is the highest at which the entire offering will be sold.

``It is important for us to have a fair process for our IPO that is inclusive of both small and large investors,'' Google founders Larry Page, 31, and Sergey Brin, 30, said in their Securities and Exchange Commission filing yesterday.

Outpacing Yahoo

The filing by Google, based in Mountain View, California, may be the biggest offering of an Internet company since the technology stock-market bubble burst four years ago. Analysts say it will value the company at about $20 billion, giving Sequoia Capital and Kleiner Perkins Caufield & Byers, two early Google backers, a 150-fold return on their investments.

Google disclosed its earnings and revenue for the first time, showing that in 2003, net income rose 6 percent to $105.6 million on revenue of $961.9 million. Google is twice as profitable as Yahoo! Inc., with a 2003 operating margin of 36 percent, compared with Yahoo's 18 percent, according to the companies' SEC filings.

``Along comes a company grounded in the technology that is supposed to democratize society and they come up with a novel way to give people a fair opportunity to purchase their shares,'' said Mark Cooper, director of research at the Washington-based Consumer Federation of America.

Drought May End

Other companies that have used online IPOs have been smaller than Google. The previous largest one was Andover.net, which sold $83 million of stock in December 1999. Its shares tumbled from a high of $77.50 that month to about $10 by the following April. The company has since been acquired.

Underwriters of IPOs and venture capitalists, who invest in young, closely held companies, have weathered a drought of share sales since the tech-stock bubble burst. After 365 companies went public in the U.S. in 2000, there were 88 IPOs in 2001, 86 in 2002 and 82 last year, according to Bloomberg data.

William Hambrecht, 68, pioneered the online sales technique with an ``OpenIPO'' system operated by WR Hambrecht + Co., the San Francisco investment bank he founded. Hambrecht has conducted nine IPOs using its OpenIPO system, raising $309.2 million.

Last Updated: April 30, 2004 00:04 EDT