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Facebook vs. Google IPO: Redefining the Tech IPO

Let’s look at the most recent high-profile tech IPO: Facebook. Facebook went public on May 17, 2012 with an initial stock price of $38 valuing the company at $104 billion. After a slight peak within the first few hours of trading, the stock price took a nosedive from which the stock has never fully recovered. The company is now trading at $21.66 (as of 9/30/2012), more than 40% below of its IPO price. The result: investors lost billions of dollars and are now suing Facebook and its underwriter Morgan Stanley. While many factors contributed to the quick fall of Facebook’s stock price, one of the biggest causes was Facebook’s sky high valuation. With investors clamoring for Facebook stock, Morgan Stanley and Facebook set the price of Facebook’s IPO at $38 per share despite concerns that Facebook’s revenue could not warrant such a high price. So what would have been a fair price for Facebook? How about, instead of Facebook and its underwriter determining the stock price, the investors decide the price?


While some banks may scoff at the idea, this is exactly what Google did in their IPO back in 2004. Google used OpenIPO, a variant of the Dutch auction, to determine Google’s IPO stock price. To buy shares of Google during its IPO, all interested investors placed sealed bids containing how many shares they wanted and how much they were willing to pay for each share. After gathering all bids, Google then counted down from the top bid until all available shares (150 million) could be sold. The lowest price offered for those 150 million shares would become the IPO price that every investor would pay. Needless to say, Google’s IPO was a success with it being heralded as one of the, if not the, most successful tech IPO in recent years. By allowing the market to determine the price per share, Google’s IPO was able to avoid the quick drop or spike in price that plagues most tech IPOs.


The link between Google’s IPO and our class is the Dutch in class, the second price sealed bid Dutch auction (or in Google’s case 150 millionth bid) is an auction. As we have covered effective way for sellers to sell their goods. By comparing Facebook’s IPO (which can be considered a first price open bid English auction) to Google’s IPO, it is shown that the most common method of auctioning might not always been the most effective. In this IPO comparison, it is shown that the Dutch auction can be just as effective, if not more effective, than the conventional English auction.


-Idiot Investor


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September 2012