Determining IPO price via Dutch auction: What FB should have learned from GOOG
In recent times, many large tech IPO’s have been followed by a significant drop in share price shortly thereafter. The canonical example is Facebook, which opened at $38 a share, and fell sharply in the following weeks, resting today in the low $20’s. Other companies like Zynga opened at $10 and are now trading in the 2-3$ range.
The rapid drop of FB indicates that the valuation price set by the lead underwriter Morgan Stanley was too high. Seeing this reminded me of another tech company who had a different way of valuing their stock: Google. In 2004, the share price was determined by a Dutch auction to find the price that would allow them to sell the amount of shares they wanted to sell to the public. This is similar to the Dutch auction as described in class and in the book, but now the price is being lowered to determine a price that the market of the IPO shares is cleared. In more detail, starting at some high price, people interested in buying the stock would submit how many shares they would buy at this price. The price was then successively lowered until the combined total of the stares bidders were willing to purchase was greater or equal to the number of shares Google wanted to sell. The price was then set at the price that would clear the market, and was made available for public purchase. This ensured that the price of the IPO was not overestimated. Any future Mark Zuckerberg’s sould take note…
See:
http://www.nytimes.com/2004/08/20/opinion/20fri1.html
http://www.marketwatch.com/story/lessons-of-googles-dutch-auction
http://www.forbes.com/2004/05/10/cx_aw_0510mondaymatchup.html