Question

In 2004, Google launched its IPO via Dutch Auction. Different from traditional IPO process we described in handout 2, Dutch Auction allows every investor, including small investors, to submit her bids online for IPO shares. It does not involve the “road show” or book building from investment banks.

Google’s IPO price was $85, and it opened at $100 at the first day of trading, reflecting a 17.6 percent underpricing. 83 percent of the IPOs issued between January and November 2004 experienced less underpricing than Google did. In your opinion, if Google had adopted a traditional IPO process, would Google have been able to set up a higher IPO price? Please explain.

Answer 1

Dutch Auction Process:-

In the Dutch auction process for an IPO, the underwriter does not set a fixed price for the shares to be sold. The company decides on the number of shares they wouldllike to sell and the price is determined by the bidders. Buyers submit a bid with the number of shares they would like to puchase at a specified bid price. A list is created, with the highest bid at the top. The company works down the list of bidders until the total desired number of sharers is sold.

The price of the offering is determined from the last price covering thhe full offer quantity. All bidders pay the same price per share. A dutch auction encourages aggressive bidding because the nature of the auction process means the bidder is protected from bidding a price that is too high.

Dutch auction example: Recently Google's IPO in august 2004. The compny opted for this type of offering to prevent a " POP" in the price on the first day of trading. While the increase in share prices is a standard phenomeon in stock markets, it had escalated to bubble territory for teach stocks during the internet bubble of 2000.

Google, the world's number one internet search engine, made its long awaited filing for an IPO with securties an exchange commission on april 29, 2004. Google set the opening price at $ 85 per share and reduced by 5 million the total number ofshares to be issued. As a result, Google and its early investors and executives sold a total of 19.6 million shares at the $ 85 price. yielding $1.2 billion dollars to google and $464 million to Google insiders.

Then, and contraty to the predictions that the price wuld promptly fallm the market price of Google shars immediately rose 17.6 or 18% on the first day of trading, cslosing at $100.34. suggesting that the auction failed to acheive its purpose of setting a ;rpice as close a s possinle to the value investors would award the stock on the open market. Two other facotrs, however, were even more important. The first factor was that the "Road show" did not go well. When a company goes public, in an attempt to stimulate demand, the top manages and the investment bankers hired to take the company public typically spend up to two weeks going from city to city making presentations to institutional investors and answerirng questions. Google's management, however, refused to answermany of the questions that were asked. As a result, investors were less willing than normal to give the company the benefit of the doubt anout its future profitability.

second factor that lowered the offer pricce was the desireof the lead underwites, credit suisse and morgan stantley, tosabotage the auction.

Road show or book building:- A When a company decides to go public, the members of the invstment firm responsinle to undrwrite or issue the IPO travel around the country in a roadshow to present the investment opportunity to potential investors. Most roadshows include stopos in major cities like Boston, chicago, Los angles, and New york city.

Traditional IPOs process:- setting a price for an IPO can be difficult. Traditionally, investment bankers would rake the top management of the company on "roadshow" to meet with institutional investors and assess their intrest in the IPO. These roadshows offered the underwriter an opoortunity to market the stock in advance, thereeby hopefully increasing demand for it, and also the opoortunity to learn how much per share large, institutional investors were initially willing to pay for the stock

However, setting a rice for an IPO through roadshow is sometimes unreliable. For exampole, Twitter was priced at $26 for its IPO, based on gauging public interest at roadshows, but traded as high as $45 on the first day of trading. This is called mispricing, where the IPO is priced too low. The feedback the underwriter received form the roadshows was obviously misleading in term of public interest in acquiring the stock.

A dutch auction is used tominimize the increase between theoffer price and the opening price of the offering. While it usually results in csome bidders paying less for the stock than they were willing to, it at least protects the underwriter and the company from having to sell hundreds, or perhaps thousads, of shares at a ridiculously low price.

After analys Data we find if google had adopted a traditional IPO process, definetly Google have been able to set up a higher IPO price.