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Google's IPO
What is an Auction-based IPO?
Auction-based IPOs, also called "Dutch auctions" are the offering of shares, where investors bid on an initial public offering before it goes public. In this auction method investors tell the company the number of shares they want and the price they are willing to pay for it. In theory, such auctions set a fair market price reflecting supply and demand, lead to a fairer distribution of shares, and the company also benefits by avoiding large commissions for banks. Auction-based IPOs are different from the traditional IPOs favored by the Wall Street, in which large brokerage houses, and powerful investment banks determine the price of the IPO and who among their list of clients gets shares.
What Prompted Google to Take this Route?
In their IPO letter to prospective shareholders, Google founders Sergey Brinn and Larry Page wrote: "It is important to us to have a fair process for our IPO that is inclusive of both small and large investors .... Our goal is to have a share price that reflects a fair market valuation of Google and that moves rationally based on changes in our business and the stock market." (La Monica, 2004). The non-traditional method of IPO was also an attempt by Google to loosen the grip of powerful banks over share floatation.
Why are most IPOs Underpriced?
The investment banks that handle the floatation of most IPOs have the prerogative of setting their initial share price; they also decide on who gets the shares. Under-pricing "hot" IPOs, ensure a big rise in the first day's share price. The clients of the banks, who have been allocated large amounts of the share at a low initial price, thus make windfall profits by taking advantage of the first day "pops."
Reference
La Monica, P.R. "Google sets $2.7 billion IPO." CNN Money. April 30, 2004. Retrieved on October 27, 2005 from http://money.cnn.com/2004/04/29/technology/google/
Critics of the Google floatation, however, contend that the Google IPO didn't fit the strict interpretation of a "true" Dutch auction because the company had reserved the right to set the final price.
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