A Report on New Issues Market – with Special Reference to Ipos Case of

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A Report on
New Issues Market –
With Special Reference to IPOs
Case of

Table of Contents

Introduction3
Problem3
Google Case: Overview4
The Company5
Competition6
The IPO6
The Process7
The Book Building process7
Dutch auction method8
Alternative valuation technique: Book building10
Appendix – 1 (A): Financial Statements of Google13

Introduction

The process of going public provides a company with much needed growth capital.  Although there is incredible wealth transferred in initial public offerings, some companies feel cheated in the bargain.  Since 1980, the first day price increase after an initial offer has averaged 18.8%. (Ritter 2002)[1].  The increase in price benefits early investors but represents market value not captured by the firm. 

But some companies have fought against the traditional IPO system. An alternative that exists in the IPO auctions, which is currently gaining popularity. Most IPO auctions had been small offerings until Google, the leader in the online search industry, announced its intention in April 2004 to auction its shares to the public.  This paper does a comparative analysis of the IPO pricing through the traditional DCF way and the modified Dutch auction method. Given this framework, we then analyze Google’s IPO as a case study.

Problem

IPO pricing – a Comparative analysis of Traditional DCF way and the Dutch auction method with findings reinforced by a live industry case study – Google. The book-building method tends is supposed to underprice the IPO much more than the auction method because the auction IPOs accurately reflects market demand. Thus the issuing company tends not to experience enormous aftermarket price fluctuation. Unlike book-building, where the underpricing can guarantee the institutional investors a profit and thus they have incentive to “flip shares” shortly after the IPO, in the auction IPO, shares will not change hands immediately following IPO because participants value the shares more[2].  These owners are not willing to sell for less than what they perceive a share’s value to be, and those who are unsuccessful in bidding will not buy the shares in the secondary market at the price higher than where they value it. Despite these advantages, was the modified Dutch auction the right way to go about it. Did the Dutch auction IPO pricing leave money on the table and if so, what might have caused it? Was $85 per share really the best price?  And was the auction really any better than traditional methods of taking the company public?   These are some of the questions that we hope to answer through this paper

Google Case: Overview

When a company is not only innovative in its service, but also in the way it does business by going against the hard-set grain of Wall Street, it offers some lessons in risk-taking.  Google, Inc. is such a company.  In addition to providing the world of internet users a new type of search engine, Google again set itself apart by choosing the Dutch Auction method in going public.  While the risk of a new product becomes easily assessed in its profitability and popularity, assessing the risk of challenging the bookmaking method of going public is somewhat more involved.  But as in many Silicon Valley startups, challenging traditional corporate modes of behavior seemed to be an inherent part of Google’s business.

The Company

Google is a public and profitable company focused on search services. Named for the mathematical term "googol", Google operates web sites at many international domains, with the most trafficked being www.Google.com. Google is widely recognized as the "world's best search engine" because it is fast, accurate and easy to use. The company also serves corporate clients, including advertisers, content publishers and site managers with cost-effective advertising and a wide range of revenue generating search services. Google was...
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