THE Google IPO|
Understanding IPO Pricing Alternatives|
MF Case 5 Group 9:|
Table of Contents
1Google versus Baidu (Dutch Auction vs. Book Building)1
2Alternative IPO pricing methods2
2.1.1Hallmarks of book building:2
2.1.2Green Shoe Option2
2.1.3Sealed-bid price-discriminatory auction6
2.1.4Sealed-bid uniform-price auction6
3Why has Book Building dominated the auction method all over the world?7 4Why underpricing persists in the Book Building system?9
5Our own understanding of the underpricing in IPOs11
5.1Conflict of interests:11
5.2Sources of Income for an IPO Deal:11
1 Google versus Baidu (Dutch Auction vs. Book Building)
Pricing method: Google by Dutch auction; Baidu by Book Building Note: returns are calculated relative to changes in the NASDAQ index in the corresponding periods and without being annualized.
Conclusion: From this chart we can see that in the short period immediately after IPO date, the underpricing phenomenon is much more pronounced in the case of using book building method to set the IPO offer price.
2 Alternative IPO pricing methods
3.1 Book Building
3.2.1 Hallmarks of book building:
1) Bids into the book are confidential.
2) Bidding is by invitation only (only clients of the book runner and any co-managers may bid). 3) The book runner and the issuer determine the price of the shares to be issued and the allocations of shares between bidders in their absolute discretion. 4) All shares are issued or transferred at the same price.
3.2.2 Green Shoe Option
A greenshoe, legally called an "over-allotment option", gives underwriters the right to sell additional shares in a registered securities offering at the offering price, if demand for the securities exceeds the original amount offered. The greenshoe can vary in size up to 15% of the original number of shares offered. When a public offering trades below its offering price, the offering is said to have "broke issue" or "broke syndicate bid". This creates the perception of an unstable or undesirable offering, which can lead to further selling and hesitant buying of the shares. To manage this possible situation, the underwriter initially oversells ("shorts") to their clients the offering by an additional 15% of the offering size, and then the underwriter is able to support and stabilize the offering price by buying back (at most) the extra 15% of shares in the market at or below the offer price. The IPO Company intends to issue 100 shares with an over allotment of 15% of the issue size.
Pre-Issue and Issue period:
The Company Issue New shares
The Company Issue New shares
Pre Issue Period: The issuer company enters into a contract with the lead underwriter detailing the terms and conditions relating to the Green Shoe Option, including fees to be charged by the lead underwriter, etc. The lead underwriter also enters into a contract with the lender-shareholder - being any of the pre-issue – detailing key terms, the maximum number of shares that may be borrowed for over-allotment. The lead underwriter would borrow from the lender-shareholders such quantity of the equity shares proposed to be over allotted in the issue, subject to a maximum of 15% of issue size. A special escrow account would be opened with one of the banks, where funds from the over-allotment would be credited. These funds would later form the “war chest” which would be used to procure shares from the market...