Question

Google’s management, when it decided to take it public, did not use investment banks to lead a book building effort. Instead, Google’s management decided to use a uniform-price auction for its IPO. Why?

Answer 1

Ans : Step 1: Understanding of an IPO offering using the investment banks to lead also called as traditional IPO process. In this, company will choose an investment banker, who will decide/value of the compant to price the share at some min. level. Investment bank will get its share of around 7-8% of the value, as they have to evaluate the pricing at best of the pricing.

Step 2: Understanding of Uniform - price auction also called as dutch IPO auctioning, used by google and it is used by very few companies. In this comany invite bids for defined number of shares, from the investors (retail/institutional) . they give their submission with price and volume. Bids ranked from highest to lowest and shares are sold at the highest price bid upto the total no. of shares company declared to sell.

Step 3: Difference between 2 approaches, why gogle used it, as in case of Case1 the investment banker may provide you some valuation that would be underpriced or overpriced, majority of cases when company is good, it is under price and company would loose on the actual value buyers are willing to pay, as after opening price of IPO, the share will shoot to market expectation level. So, in case of Dutch IPO , probability is higher that company is getting amount as per the market expectation and that is what google also did.