Google Ipo

IPO Auctions: Case Study

Game Theory

Zachary Gentry

Bill Johnson

Katherine Peterson

Nikhil Vaswani

Table of Contents

Introduction 3

Book-Building vs. Auction IPOs 3

IPO Auctions and Revenue Equivalence 6

Historical Experience with IPO Auctions 8

Google IPO Case Study 9

Auction Design Flaws 9

Investor Insult Value 14

The Game of IPO Poisoning 14

What Could Google Have Done? 17

Conclusion 19

Introduction

The goal of most aspiring entrepreneurs and their venture capital backers is to “go public.” This process showers a company with much needed growth capital. Although there is incredible wealth transferred in initial public offerings, some companies feel cheated in the bargain. Since 1980, the first day price increase after an initial offer has averaged 18.8%. (Ritter 2002) The increase in price benefits early investors but represents market value not captured by the firm.

Some companies have fought against the traditional IPO system. One alternative method currently gaining in popularity is IPO auctions. Most IPO auctions had been small offerings until Google, the leader in the online search industry, announced its intention in April 2004 to auction its shares to the public. This paper explores the economics of IPO auctions and the practical realities faced by companies. Given this framework, we then analyze Google’s IPO as a case study.

Book-Building vs. Auction IPOs

The IPO process in the United States is very well developed. After a company develops its first audited financial statements, it takes approximately 4-5 months until closing. In that time, an army of individuals from the company, its investment bank, and both of their attorneys hammer out complex negotiations on the eventual shape of the business. While the process requires vast amounts of specialized expertise, connections and patience, investment banks participate knowing that they will be...