New Issues Market –
With Special Reference to IPOs
Table of Contents
Google Case: Overview4
The Book Building process7
Dutch auction method8
Alternative valuation technique: Book building10
Appendix – 1 (A): Financial Statements of Google13
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). 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.
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...