Capital Markets

Did Google IPO Invalidate Dutch Auctions?

Not at all, says one pioneer of the unconventional bidding process.
Ed ZwirnAugust 23, 2004

By many traditional measurements, last week’s Google IPO could be considered a bust. Bruce Mann, one of the Dutch auction pioneers that the offering employed to price its shares, however, says the process is not to blame.

The Internet search engine was forced not only to price at $85 per share, much lower than the $108 to $135 range forecast by the company, but it also cut back the size of the offering, meaning that Google wound up raising about half the money it had originally announced.

At first, Google’s founders hoped to sell shares via a Dutch auction, a bidding process aimed at finding the lowest price at which an issuing company can sell all the available shares. The process would have allowed smaller investors to get involved in the offering, which is traditionally reserved for institutional buyers.

Then, in a partial retreat from the Dutch auction plan used for the IPO pricing process, selling shareholders also announced that they had granted the underwriters the right to buy about 2.9 million additional shares at the initial public offering price to cover over-allotments.

Mann, a senior partner at law firm Morrison & Foerster LLP and one of the pioneers of Dutch auctions as a former WR Hambrecht investment banker, takes a different perspective. He says that Google IPO accomplished the goals of the company founders and worked well for the investors.

“If in the beginning there were irrational expectations about Google’s pricing, that does not reflect adversely on the Dutch-auction process,” Mann said in a written statement. “Despite a bad market, the Google IPO was well priced and the shares were distributed fairly.”

“The Google IPO shows that the market is smarter than any individual investment banker,” Mann added. “It appropriately discounted the stock because of risk; there were no hidden balls. Compare the Google offering to so many of the technology IPOs of the late ’90s, when in hours or days after its IPO a stock would rocket up to huge multiples of its initial price, or would open at an enormously inflated price only to collapse.”

Google closed the first day at just over $100 per share, including an 18 percent premium on the offering price. Mann notes that the increase was not so great as to encourage and reward “flipping” in which the stock is sold for a quick profit. He cites the lack of volatility in the immediate aftermarket as validating the Dutch-auction process as a pricing system.