Google IPO
“Massey Ferguson”
Google’s approach to the IPO process was different from a traditional IPO. Describe in 1 page or less the differences as well as Google’s reasons for each difference.
In most of the cases, traditional IPO is processed that an investment bank deals with the pricing. The bank represents the seller and the pricing is set in an opaque process involving the bank and its major investors. The investment bank usually receives a certain percentage of proceeds in the IPO and therefore has incentives to sell at a higher price.
However, on the other hand, Google's IPO was processed in a different way called "Dutch auction" or "Dutch IPO". Google first announces how many shares they are looking to sell and any buyer can submit bids in terms of both quantity and price they are willing to pay. All bids are ranked by price from highest to lowest. And then shares are sold to the highest price bids up to the bid which clears the market of shares. The price buyers actually pay is the price of the bid that exactly cleared the market.
In Google's case, there was still a gap of about 17% between the IPO price and the opening price on the first day of trading, suggesting that the IPO is still underpriced. In fact, many of the IPOs experienced an underpricing in 2004. It's difficult to tell exactly the reason for mispricing, but Google executives were blamed for mishandling communication around the IPO such as lowering the declared target price of the IPO just a few days before the auction.
Overall, in fact, Google was not the first company to use this method but the case is rare and strongly discouraged by investment bank in US markets. According to some results, the Dutch auction process is supposed to do better for the seller including employees, owners, original investors in the company since the bidding process is to target the top demand and price in the market.
Google’s approach to the IPO process was different from a traditional IPO. Describe in 1 page or less the differences as well as Google’s reasons for each difference.
In most of the cases, traditional IPO is processed that an investment bank deals with the pricing. The bank represents the seller and the pricing is set in an opaque process involving the bank and its major investors. The investment bank usually receives a certain percentage of proceeds in the IPO and therefore has incentives to sell at a higher price.
However, on the other hand, Google's IPO was processed in a different way called "Dutch auction" or "Dutch IPO". Google first announces how many shares they are looking to sell and any buyer can submit bids in terms of both quantity and price they are willing to pay. All bids are ranked by price from highest to lowest. And then shares are sold to the highest price bids up to the bid which clears the market of shares. The price buyers actually pay is the price of the bid that exactly cleared the market.
In Google's case, there was still a gap of about 17% between the IPO price and the opening price on the first day of trading, suggesting that the IPO is still underpriced. In fact, many of the IPOs experienced an underpricing in 2004. It's difficult to tell exactly the reason for mispricing, but Google executives were blamed for mishandling communication around the IPO such as lowering the declared target price of the IPO just a few days before the auction.
Overall, in fact, Google was not the first company to use this method but the case is rare and strongly discouraged by investment bank in US markets. According to some results, the Dutch auction process is supposed to do better for the seller including employees, owners, original investors in the company since the bidding process is to target the top demand and price in the market.