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Dutch Auction IPO: How Companies Like Google Sold Its Shares

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The world of Wall Street and investments can often seem strange and intimidating, but among the aspects that make up the financial world, one of the most important events that can happen to a company is by going public, also referred to its initial public offering. The article linked above describes how Google, back in 2004, choose to use a modified Dutch Auction as a way of setting up their IPO. One of the reasons that Google had choose this way of setting up their IPO, as opposed to the traditional way, which consists of investment bankers working with money managers to set up a price, was because Google believed that the Dutch Auction would be beneficial to the company was because they believed that this type of auction provided consumers with more ownership of the company as well as the fact that Google itself uses a sort of auction system when displaying advertising spots next to searches. However, while this type of auction was successful for Google, other, more recent internet companies like Twitter and Facebook have chosen to utilize more traditional methods of establishing their IPO due to the risks perceived through this method, as it basically relies entirely on the investors, making it unpredictable.

Looking at this article, its funny to see how some of the risks that play into the reason why Dutch auctions for IPOs aren’t used often nowadays are inherent in the nature of the audition itself. As discussed in class, betting your value for the product (or share in this case) is seen as the best way to achieve maximum payoff. However, in the case of Dutch auctions for IPOs, its the very fact that the investors get to choose this value that creates the risk. If a company uses a Dutch auction for its IPO, and if the investors don’t see that high of a value in the company, then the resulting IPO could be a lot lower then the company could have been expecting, which could negatively impact the company, as a low IPO could result in lost potential capital. In addition, a high IPO could mean that the IPO is seen as overpriced, which could cause it to fall in value and lose marketability and potential investors. Seeing this, it is interesting to see how what is the best strategy for the customer in an IPO dutch auction can also result in a bad payoff for the company. In this case, the maximum payoff that the company can get by selling shares at a certain price may not be the price selected by the investors, which means that this process can be good for the investor, but possibly bad or the company. This dynamic is something that we haven’t seen before in class, and it is fascinating to see how the dutch auction format could possibly have negative consequences for the company, or, in this case, the seller. Looking at the article, its clear to see that the dutch auction format caused Google stock to open at 85 dollars instead of the lowballed estimate of $108. While Google did recover from the underpriced offering, it still draws attention to the risks involved in dutch auctions. In addition, this article highlights how auctions, while good for commodity goods, may not be the best way to sell stocks.


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