Executive Summary - The Google IPO

The presentation will demonstrate the different types of fund raising process, and focus on the Dutch Auction as why Google chose such method and why our study object chose such method, then illustrate the result by comparing the latest stock price with the original offering price and demonstrating the purpose of raising the equity with the current performance of the company.

Case background and Introduction to IPO
Google started out as a research project of determining the importance of a website’s based on the number of pages, importance of those pages and number of backlinks by Larry Page and Sergey Brin in 1996. By 1998, the two genius incorporated Google as a privately held company. Along the years of rapid growth of the company, Google decided to go public and released IPO in 2004.
IPO process can be divided into 6 stages namely preparation, planning, pre-marketing, marketing, IPO and aftermarket stage. In preparation and planning stage, issuing firm hires an investment bank as a lead underwriter which aligns with other firms to form syndicate in order to bear the risk. During the pre-marketing stage, underwriter put together a prospectus which describes full business disclosure, management team and strategy of the firm as a key document when marketing the firm. The IPO price and share allocation occurs once the key investors’ expressed their interest in terms of their intended price and quantity of shares. During the IPO stage, underwriter is responsible to stabilize the share price within the limit so that it would not go overpriced or flipped with the expected value.

Types of fund raising process
One method called Fixed Price, usually taken across on Dubai Financial Market when the "issuer" prices the share at a pre-determined level. Since the demand is known only after the closure of process, leading to an undervaluing price which often rises dramatically in few days after IPO. Another method called Book Building as company offers its shares within a price range. The stock price is more realistic and market determined while it is also popular for its transparency of allocation. But Book Building is limited for only suitable for large issues in matured market as the issuer must be fundamentally strong and well known.

What is Dutch Auction? Why Google chose this method?
“Dutch Auction” originates from the flower auctions in Netherlands in which bidders will decide how much to pay and how much quantity they want. From IPO’s perspective, a Dutch Auction IPO adopted a similar approach: share price and the number of shares to be allocated to investors will not be arbitrarily set by the issuer or the underwriter but instead, each bidder would state the number of shares intended to buy and the price per share that the bidder is willing to pay. After adding all the bids and sorting the prices, a market clearing price will be set after the bids are submitted at which all the shares offered may be sold to bidders and if there are excess demand, the shares will be allocated on pro rata basis. Dutch Auction IPO is however likely to encounter the problem of underpricing due to the unavailability of market information and lacking of knowledge of competitors.
Google's controversial IPO generated much interest because of its use of the Dutch auction method in pricing and selling its offering. But why Google chose such unconventional method? Why they didn’t concern about the uncertainty of its seldom used method in the market? Is it much more beneficial than the traditional auction method to Google? We believe this result as of few mutual factors. Theoretically thinking of those founders in Google evaluated the Dutch auction can generate the most satisfactory result to solve their challenge and it is fair method to all investors. However, their theoretically thinking makes them to believe the Dutch auction can be executed perfectly without any uncertainties. Also, they are eager to make Google be unconventional so the traditional auction method may become the least considered option as it will make Google be conventional. If it lacks of one of those factors, the whole story may be different.

Google IPO results / conclusion
In regards to share price development of Google, the trading transaction in its 1st week, the price rose from initial offer price USD85/share to US$100.01/share (17.6% UP) which it has indicated that the pricing model on “Dutch modified auction” did not fully reflect and capture the “real price” which resulting of less capitalization and left money on the table. However, one of the upsides using Dutch modified auction is less expenditure on direct cost e.g. 2.8% of gross proceeds for equity vs. 5.5% of book-building. Likewise, if Google were chose to go for the wall-street game “book-building” approach that would maximize the capitalization as a whole.
In our analysis, each IPO methodology has its own merit and it is hard to say whether the resulting of share price is neither under-priced because of applying Dutch auction nor book-building. However, if the long term direction of Google is to heavily invent on advanced features such as high altitude wind turbines, stratospheric balloons etc. which may require an extensive research and investment, the need of capitalization would be extensively higher and the likelihood of going for book-building is recommended.