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Dutch Auction IPO

When a private company looks to expand and raise massive amounts of capital, it can do so buy selling equity. By selling shares of the company’s profits, companies can gain necessary funding to pursue bigger and riskier projects. This process of selling equity to the general public (which includes both experienced financial institutions and the common citizen) is called an Initial Public Offering.

Generally, the stock price of a company is set by a financial institution, one that finds the expected value of the stock and makes large volume sales to the market. However, about a decade ago, Google decided to sell its shares through the Dutch Auction method, which allows all potential investors to submit a bid price and a volume of shares. Once all the submissions have been received, Google will set the stock price to the highest price that can sufficiently reach the desired number of shares. In other words, the price of the stock begins with the price of the highest bidder, and subsequently drops to sell more and more shares until the quota is reached.

It is interesting to think about the Dutch Auction style of IPO and how it relates to the auctions we have studied in class. The auction is most similar to the second-price auction, but can go beyond the the second-price when settling on a stock value. Thus, in the case of the Dutch Auction, is it in the best interest of most investors to bid their true value and hope that the price of the stock is lower than what they submitted.

It is also interesting to think about the strategy to not participate in the IPO but still buy the stock when it is on the open market. As opposed to the auctions we have studied in class, this auction does not end once the price and sellers are set. People are constantly buying and selling their stocks as the price will fluctuate with company performance and investors’ expectations. Thus, potential investors have the opportunity to wait until the stock is set at or below their true value for the stock, and then proceed to buy it under the impression that it is “undervalued”.



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October 2014