Preparing for the Google IPO: A revolution in the making
Wenying Li, Xue Lin, Yankai Wang
October 28, 2014
Upon deciding to raise capital for operations and growth, a company looks into preparing an initial public offering to get access to capital market. Unlike other companies following conventional IPO processes, Google, the largest search engine company, revolutionized equity markets with unconventional price-setting mechanism, reduced role for the underwriters, and dual-class shareholder structure,
Unlike other companies going to public through book-building pricing process, Google adopted Dutch auction. Google’s adoption of Dutch auction was largely driven by Warrant Buffet’s thought of the stock market ‘bringing your stock to market below value simply did not make sense’. Dutch auction would set the price of one company’s share at the lowest successful bid and all investors bidding at or above this price would be entitled to receive shares. One of advantage for Google using Dutch auction is to attract investors to offer the maximum price they are willing to pay and investors only have to pay the lowest bid price. From Google’s standing point, use of Dutch auction may lower its IPO costs, and avoid possibility of serious underpricing. From underwriters’ standing point, use of Dutch auction may weaken their influence in setting the price of new issued shares and avoid losses due to underpricing of IPOs relative to book-building process.
Further, Google adopted ‘modified Dutch auction’; it reserved right to set final sale price, share distribution, and other auction terms based on ultimate result of auction. This modification enabled Google to avoid unusual overpricing problem.
Role for investment banks
Google markedly reduce underwriters’ role by employing unusual a total of 31 underwriters including two lead underwriters, Morgan Stanley and Credit Suisse, to distribute its shares.
Google did so mainly because it...
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