The encyclopedia · Finance & Accounting · Financial decision · 2004
Google auctioned its IPO so small investors could bid alongside the banks
In 2004 Google ran a Dutch auction IPO that priced shares by demand and let ordinary investors bid, though missteps kept the first-day pop.
the move
In a traditional IPO, investment bankers find customers, set a price and hand the shares to their most favoured clients, often underpricing so those clients enjoy a first-day 'pop' while the issuing company never sees the extra money.
Google ran a Dutch auction instead: it invited bids from banks and ordinary investors, then set a single clearing price at the highest level that sold the number of shares it wanted, so everyone who won paid the same price and no bank got a private allocation.
In August 2004 Google priced at $85 a share, cut down from the $108 to $135 range after demand looked weak; by Friday the shares had jumped to $108.31, a 27% gain that looked like a conventional pop, which critics said showed the auction had left value on the table.
The shortfall came from execution rather than the idea: only two underwriters were paid below market, several banks bailed, brokers made it hard for small investors to bid, and a quiet-period stumble hurt demand.
why it works
- A clearing price set by bids reveals demand instead of a banker's guess.
- Opening the bidding to individuals removes the favoured-client allocation.
- All winners pay the same price, so no insider gets a cheap deal.
- If execution errors do not suppress demand, an auction can capture the true value.
what transfers
An auction can price and democratize an IPO, but only if you let it clear.
what came after
Google's shares popped 27% in two days, so the issuer arguably left money on the table, and Google later turned to conventional book-building for follow-on offers; the Dutch auction stayed a rarely used but often cited alternative for IPO pricing and allocation.
references
- Google's IPO winds up delivering profit, if not reform, to supporters
- Did Google IPO Invalidate Dutch Auctions?
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