Question

In 2004, Google launched its IPO via Dutch Auction. Different from traditional IPO processes(Firm commitment and Best efforts), 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

The question essentialy entails that if google had opted for a traditional IPO instead of the dutch IPO, would it have been able to bag a higher price. To understand this, lets dig down into how things panned out in 2004.

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Google's IPO price was $ 85, which opened at $ 100 on the day 1. This was trememendous underpricing with respect to the share. When this happens, there is money left "on the table", which implies that the value of the stock was not properly appropriated by the firm. Where googles difference amounted to 17%, its peers during the same time period (other search engines that had IPOs) offer price to open price jump amounted to approximately 10%.

Confirmation of mispricing: Soon after this happened, within months, googles share price rose to $216, which made it clear thet the initial IPO Price was mispriced. However, some people suggested that it may have been due to a massive rush in the "search engine" segment of the market.

Why mispricing may happen through Dutch Auction?

1. As there were no road shows, and not much effort was put in advertising. It was difficult for the investors to judge the price of google. The critics quoted that the process was "too secretive"

2. There is less scruitny by investment banks. In this case, the firm's objectives of purchase might not be clear to the investors, leading to a discounting of the initial offer price.

3. Very few companies had used this kind of auctioning before. Thus, investors might have been cautious and would have put a large price range.

Opinion - If google would have adopted traditional process-

1. More road shows would have been conducted, and adequate pricing would have been done by individuals who are qualified and equipped by the required resources.

2. More scruitny, leading to more investor trust.

3. Investors might have been more specific to the price range they chose.

Thus, had google gone by the traditional route, it may have been able to set a higher price.

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However

It would be perfectly fair for a firm /google to go for the Dutch Auction mode of raising funds, provided-

1. They convey the information to investors appropriately, considering that they are not conducting road shows

2. Make sure that investor confidance is retained

3. Take care of the corporate governance issues that might arise due to this

4. Do a analysis of both the processes (Dutch Auction and traditional) and pick which one would be the best.

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