Google Considering Dutch Auction For IPO; Investment Bankers Crying
from the sorry-about-that... dept
New banking firms like WR Hambrecht have been pushing the idea of the “Dutch Auction IPO” where instead of having a bunch of greedy investment bankers setting the price of your IPO (and, of course, pricing it below the real market price to guarantee a first day pop that the press likes so much – even though it means lost money to the company) you let everyone and anyone bid on how much they want to pay, and then set the actual IPO price based on the highest price where all of your shares will sell out. For years, this option has been around, but most companies have been afraid to try it out, believing (perhaps correctly) that they needed big name investment bankers touting the stock to guarantee that it got enough attention from the financial community. Google, of course, doesn’t have that problem. Everyone has been drooling over the concept of a Google IPO for ages, so they don’t necessarily need the same support of a big time underwriter. So, it’s no surprise to hear that they’re at least considering the idea of a Dutch auction IPO sometime early next year. It does fit with Google’s general nature, and could do wonders for those who believe in Dutch auctions as a much more equitable way of doing an IPO. Chances are it would make Google a lot more money, too, since it would cut their underwriting costs, and make sure that the deal wasn’t underpriced – meaning Google gets the money that otherwise would have been thrown away to those flipping the stock on the first day. Still, the investment banks wooing Google probably are scared of this idea (they’ll make less money, and won’t be able to give their “friends” the favors they surely want) and will try to do whatever they can to convince them otherwise.
Comments on “Google Considering Dutch Auction For IPO; Investment Bankers Crying”
Google and an OpenIPO
I disagree that the IPO auction method fits with Google’s general nature. Google has succeeded by providing value to users, not by screwing the little guy whenever possible. The only advantage an auction would have is that Google might be able to set off a stampede that would price the shares far above a sustainable level (as with Singapore Telecom, East Japan Railway and of course Argentina Telecom, among others). Google would raise more money at the expense of investors, who would lose out when the stock fell back to a reasonable price. Google’s philosophy has never been “take the money and run” – why should they start now?
Re: Google and an OpenIPO
you don’t know what you’re talking about.
having a dutch auction IPO guarantees a fair price for the stock, eliminates money left on the table and therefore decreases flipping. it also is less expensive for the company going public.
this makes perfect sense for google, who is already a household name, and does not need the backing of a large investment bank.
google would not be “screwing the little guy” nor would it be “taking the money and running” as you suggested. it would only be taking the money people think its stock is worth, their bids, which would result into a fair market price.
Re: Re: Google and an OpenIPO
You seem to take your claims as proven fact. Have you looked at the track record of IPO auctions in Argentina, Japan, Singapore, Taiwan, Australia, the U.K., Switzerland, Portugal, France, Israel or Turkey? Have you thought it through carefully? How can a uniform price (mistakenly called a Dutch) auction “guarantee a fair price for the stock”? What is there to prevent free riders from bidding the price up excessively high, as they’ve done in other countries?
The theory behind IPO auctions is based on a private values setting, where everyone “just knows” how much the auctioned item is worth to them. But, if there’s some uncertainty about the value, and if time and effort can help someone to get a better idea, then a uniform price auction is a very risky, inefficient way to set the price.
Your claim is so vauge that I can’t tell whether you’re referring to theory or practice (or just repeating the Hambrecht sales pitch). But both theory and past experience indicate that a uniform price auction does not guarantee an accurate or “fair” price.
Re: Re: Re: Google and an OpenIPO
Auctions are the least common form of price setting. The final offering price is the “clearing price” and all investors are charged the clearing price for their shares. All shares are sold at the one price, even if an investor was willing to pay a higher price. An auction can be beneficial for the issuer–generally it incurs lower costs and it should be able to maximize proceeds. However, the potential lack of aftermarket demand can cause shares offered in this manner to languishi in the stock market which does not bod well for any future offerings it may have planned. But to Google, maybe this circumstance will not happen.
So if use auction, Google can save costs.
Dutch Auction is one kind of auction developed my WR Hambrecht in 1998 also called “openIPO”, in which investor set the price of an offering through an open bid process. The investment ban introduced the process in response to complaints by retail investors that they were unable to participate in IPOs because the lead managers of deals would allocated shares to their most important clients first, regardless of how much an investor might be willing to pay.
Re: Re: Re:2 Google and an OpenIPO
The clearing price is the highest price at which all of the shares can be sold. This price is not always used by Hambrecht. Auctions that price below market-clearing are known as “dirty” auctions, or as “leaving something on the table”, and they’ve been used in the U.K., France and other countries.
The first OpenIPO Hambrecht auction to price below market-clearing was Andover.net, their third IPO. After that, they changed the rule to make it harder for everyone to figure out if the offering was priced below market clearing. When I contacted Hambrecht to ask what the market-clearing price was on the last few auctions, they told me that they couldn’t tell me because bids were proprietary information belonging to the issuer. When I contacted the issuers, they told me that they couldn’t tell me anything because it was proprietary information belonging to Hambrecht.
IPO auctions have been used in many countries, but Hambrecht’s IPO auctions are the only ones I’ve heard of where virtually no details about the bids are released to the public. Releasing general information about the bids has been routine for everyone except W.R. Hambrecht, which seems a bit odd for a company that claims to be bringing transparency to the process. They have every right to price below market-clearing, since the possibility is clearly explained on their website. Why are they so secretive about a supposedly straight-forward process?
Google and OpenIPO
It should be interesting nonetheless to see how this all has panned out. Since this article’s writing, I have seen results with favorable outcome. I am glad that it has not lined the pockets of the investment banker but actually benefitted the end user.
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