Google shares took off, but the auction didn’t
https://www.cnbc.com/2014/08/19/es-took-off-but-the-auction-didnt.html
We have discussed several types of auction in the last week. One of them is dutch auction, which is also an option for companies when going public. Google used this method for its IPO in 2004. However, after 15 years, the auction did not become too popular. Instead, experts suggested, “for 99% of the companies the traditional approach is the right answer.”
As mentioned in the article, the difference between a dutch auction IPO and a traditional IPO is that the share price sold in a dutch auction IPO is only determined by potential investors of the shares. Therefore, compared to a traditional IPO where the price and quantity of shares are both already set by banks, a dutch auction IPO significantly increases the risk since the money raised is hard to control. On the contrary, a dutch auction IPO will reduce administrative fees paid to banks. It also encourages individual investors to get involved in the stock market since dutch auction does not require individual investors to rely on banks’ researches. However, as mentioned, because of the risk of dutch auction, most companies are still suitable to go public in the traditional way, which is paying banks to “sell a deal to their clients.”
To further explain why dutch auction is not favored by the majority of both companies nor investors, I did research on why issuers do not prefer dutch auction. Winner’s curse is commonly seen in auctioning when the winner wins the bid with a price that actually exceeds the value of the object. Using dutch auction, investors may end up paying much more for the shares than they are worth. Without detailed investigation carried out by special agents such as bankers, investors are unwilling to bear the risk. They will also have to be cautious on the bid they give, which is influenced by the number of bidders. Underestimating the number of bidders will result in overbidding the price, which falls in winner’s curse. Because of the two factors, investors are still more comfortable with the traditional way of IPO even in that case, both investors and companies will have to pay banks a great amount of money to do research.
Additional source: https://pdfs.semanticscholar.org/89a2/d4b89bfc1532c1a5caa1b0df5e863e57c654.pdf