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Google's IPO Trading Defies Dutch Auction Logic?
TopShelf writes "Today's first-day trading gains for Google may not have just been the result of ambitious day-traders. This story from CBS Marketwatch alleges that Google deliberately set the $85 IPO price well below the true clearing price of their Dutch Auction, and issued fewer shares than expected, perhaps with the intent of limiting supply and assuring themselves a nice runup during the first trading day. In the story's informal survey, winning bidders only received 75% of the shares they should have."
My its sad to see all the people switch sides on Google since they finally decided to become public.
Of course, now Google will be accountable to shareholders, which means their primary goal will be profit, NOT providing a cool Internet search engine.
Maybe it won't happen right away, but I see Google turning into a useless advertising poisoned portal someday which takes an hour to load on a DSL connection and doesn't work on anything but MSIE.
-Zorin the Pessimist
Of course they wanted to see green next to GOOG at the end of the day, and not red. Imagine where they would go in the days to come, had they ended in red! Google definitely plays their business, financial, and engineering games with human psychology in mind, and they play it so well, they are always taken as 'the good guys'.
Simpy
105 was the bottom of the expected range, until the day before when the lowered the price by $20, and the number of shares by a few million.
So then it went up $15 the first day, instead of dropping $5.
So it's still funny business as usual. Had they not changed all the numbers the day before, it would have been completely different, and very likely would not have moved much.
- Adam L. Beberg - The Cosm Project - http://www.mithral.com/
Apart from anything else, Google has, as I understand it, been making money for a while now. And hey, they've been quasi-accountable to their 'angel investors' for a while too.
Not to mention, that the 'Google Guys', and the board, still retain absolute control over the company. At no time since they got big, has Google not been out there to make money. They aren't evil, but they aren't a charity either.. So it seems a bit premature to go all chicken little and run around crying 'Google is turning into Yahoo!'.
fortune -o
Another interesting point is that some venture capitalist firms pulled the stock they were going to sell. Did they know something the public doesn't?
D -GOOGLE.html:
From http://www.nytimes.com/2004/08/18/technology/18CN
Two of Google's big early investors, the storied Silicon Valley venture capital firms Kleiner Perkins Caufield & Byers and Sequoia Capital, decided to withdraw their combined 4.5 million shares from the auction early yesterday, betting they can get a better price at some point in the future.
The surprise isn't how often we make bad choices; the surprise is how seldom they defeat us.
Actually, the shares they are selling are NON_VOTING shares, so the pressure is not as great as you think. They will still be able to take risks, which is how you get both cool and success.
print "Oink!\n" if ( $tail =~ "pull" );
And that is ironic how?
Do you even know the meaning of the word?
Help Brendan pay off his student loans
The news article I saw said held the opinion Google lowered the number of shares in the offering in order to increase the initial offering price-- since the "dutch auction" system had the direct effect that the fewer shares involved in the auction, the higher the final price of the auction would be set. This made a bit more sense to me than this "limiting supply" theory.
I think about the only thing to take away here is "no one fucking understands the stock market, and anyone who claims otherwise is selling something".
Irritable, left-wing and possibly humorous bumper stickers and t-shirts
IANADT, but it seems that an upward movement was almost inevitable, given the pre-set condition that the price would be set such that fewer shares would be received than "won".
The stock seems to have stabilized at $100, $13 away from where it started. If producing a stable stock price close to the IPO price from was Google's intent, at least as far as today is concerned they suceeded.
I don't know what Google could have done to please people here. If they set the price too high they're overpriced and foolish. If they set the price too low they're "causing a pop" and greedy. At this point, I'm just going to shrug and get on with my life.
Seriously, wtf?
So a company made an IPO. Wow.
Not to sound like a troll, but people are clamoring about this and I just don't get why. I use google as much as the next person and they're a good company, but what does it have to do with the stock market?
Do people think this is a magic pot of money? Just because it's google doesn't mean it will constantly increase in value. Just because it's google doesn't even remotely guarantee that the stock will perform well. That's all at the hands of the traders.
So really now, what is the big deal all about?
And I suspect that if that does happen, I would use Google the same way I currently use Yahoo -- only under extreme protest.
The only way Google can succeed is by remaining Google, everything else has already been tried and run into the ground.
There's lots of complaining from the established brokerages about how Google did it. They are churning the media on this one. Google pulled a fast one on the street and they don't like it. The way it was done would have meant brokers could pass out cheap shares to their buddies. Google's Ductch auction meant that the market got to bid a price. This "first day run up" can be purely ascribed to wild day trading. There's nothing Google could do about it. They were wise to get a good price beforehand.
Google's valuation is pretty rich :
CBS says it's 23 billion. General Motors is 23 billion. Is google worth GM? I don't think so. The current $100 price should shrink quite a bit as the the entusiasm wears off.
Google is sitting pretty for the moment, I hope their employees and early investors can pull a little bit out while the price is still high.
Screw Wall Street, they were denied insider's cut and kudos to Google for being patient and suceedding in doing it a different way.
If it wasn't for the dutch auction, you know what would've happened: the stock price would've been set at $15-20, insiders and bankers would've bought at or below that range, and then when it popped at $100, they would pocket the difference.
With the auction the pop was smaller and the company got more cash.
I think they did all right.
You're going to hear a *lot* of noise about this from those bankers and wall street types that would've preferred the $15 to $100 pop. They will float all kinds of rumours about google just to make sure nobody else tries to price their IPOs more fairly in the future.
Follow the money, as usual...
They just didn't want first day balloons of 100% or more, which is what happened during the dot com era. The people lucky enough to buy at the offering price (generally the underwriting banks' best customers) made out like bandits, at the expense of the company and insiders selling their shares.
Wallstreet doesn't care if you make money. They only care if you continue to make MORE money each year than the previous year. This is why it's idiotic to take a company public. Once you do this, you move your company from a mission statement of "make a profit by making a killer product and satisfying customers" to "continually increase profits at all costs". And that, my friend, is how you end up with Enron and Tyco.
In a private company, it's enough to pay the bills, pay your employees, have happy and loyal customers and make yourself a nice chunk of cash in the process. You're happy to pocket $5mil every year for yourself, but wallstreet wants $5m this year, $10m next, $15m the net and $50 the one after that, until the only way to continually see huge profit margins and increases is to resort to some shady business - or watch your company turn to shit and crumble (Sun Microsystems).
This is a troll? Just because it doesnt say "Google is teh r0x0r! M$ is teh suxor!"?
Just because Google is "cool" doesnt mean that it is a great place to invest your money. Seems to be way too many people on here who talk aobut how great a buy Google is, without backing up that claim with fact.
The Google market share is not going to grow much further, and with Microsoft about to launch a big search engine of its own to try to take on Google, Google's market share can only really go downhill from here. Unless they start coming out with some very innovative ideas, I cant see how the stock prices will increase much further.
And here I thought we had all learned our lesson about buying over-hyped tech stocks with cool sounding names.
I am genuinely curious, why would any of you buy GOOG shares at their current prices? Besides day trading I wouldnt touch GOOG.
Movement of the stock price post-IPO gets Google nothing, nothing. Pricing the shares at 105 and ending with a $5 loss would have netted the company about $1.5 billion more and they obviously would have chosen this if they had the option. They just didn't, and had to price it at $85 due to lower priced demand than anticipated.
The original poster was ignorant of how an IPO works with the claim that they netted a nice little gain after the IPO.
I happen to agree that the canadian system is better than the US system (I live in the US) but this is not typical. People in the US would tend to say their system is better and people in canada say theirs is. All this means is people in a democracy tend to be reletivly happy with the way their own governments do things.
"It is not how things are in the world that is mystical, but that it exists." -Ludwig Wittgenstein
because 100% of them are canadian! God bless the USA . The grass is always greener and more grass grows in the fields than the tundra. Move up there and become one of them if its so gravy to be a canadian. I wouldn't become canadian if it ment my entire family would get 100% health care. Fuck health care, the human race has survived thousands of years without specialized Dr's and drugs. If your ignorant enough to think we ALL NEED 100% health coverage then you deserve a good chunk of natural selection. Most people don't need it and the rest are addicts. Only a few are truely needy.
Not to turn this into a fruitless point-counterpoint, but:
Under the 100% for highest bidders, less for lower (but winning bidders), you are essentailly punishing the more "accurate" bidders. A Dutch auction establishes a fair price for a pool of identical items based on what people are willing to pay.
If Google, after considering the bids, decided to offer their items for sale at the "fair" price of $85... why should a person who bid at the fair price, $85, be punished for not bidding higher.
Google did say publicly (and more importanly, in their timely and exhaustive notices to registered bidders) that bidders may not receive all their allocation even if they bid above the offer price, in the interests of wider access to the IPO. I see that as Google being not evil.
In this case, they couldn't announce how they would allocate the shares before the bidding started, because the allocation of shares was based on how the bidding went. They actually were monitoring the bids to decide how to allocate and when to end the auction.
BTW, I'm not sure about this, but it seems that Google is restricted in what it can publicly say by SEC rules... and besides, in the case of the IPO, they were making their decisions known to all those who could bid.
Marcin
You're not really missing much of importance, but there is one thing to consider: You're thinking in the long run. Many, many people on Wall Street are very short sighted.
It's a nice conspiracy theory. But it makes little sense, if you pause to think about it.
The company receives only the capital raised through the IPO process. A higher capitalisation on the secondary market doesn't translate to a larger pot of money for the company. Google insiders would also be locked in and unable to sell their shares on the secondary market for a period of time.
Google would therefore have every incentive to ensure a high IPO price. If you believe Google deliberately set its IPO price low at $85 to get a first day "pop", then why didn't they set it even lower, at say, $50, or even, $10?
If you don't have $425 to invest, how can you even consider yourself an investor?
I think the story has another explanation: Institutional investors stayed out of the auction, hoping that the IPO would fail for "ideological" reasons* and betting that the price would drop drastically when trading opened. Seeing that the price wasn't dropping, they began to pick up shares here and there, further boosting the price on the first day.
*Google's dutch auction IPO is a slap in the face of the investment banks and the institutional players, since neither is able to get their usual unfair advantage.
It's not offtopic, dumbass. It's orthogonal.
Really, the change in price after the IPO should net Google more in the long run since the number of shares was cut from the originally quoted amount. They always have the option to sell off the shares they originally intended to sell as the stock increased in value.
Google is merely trading time for good will in the eyes of the public and in the eyes of the stock market. A stock that takes a plunge on IPO tends to create a good deal of negative perceptions regarding the company. Everyone and everyone was looking at Google to see how this played out.
Had the stock gone red, you can be that headlines would be heralding the demise of Google. Instead, they are up what? 17%-18% Sure the company could have made money on the IPO, but that would have cost them in image. They can still sell their shares at a later time, possible at a higher price.
It is just a matter of now or later and how they want to be perceived.
I also disagree that they lowered the price because of lowered demand. I think they lowered the price and cut back the supply because they saw what people were willing to pay and thought: We can offer it at that price that people are willing to pay, get our money now... or offer the stock at a lower price, cut supply and create an upsurge in price.
The "performance" of the stock on the IPO day is something that you can't buy with money. The mindset that comes with that kind of IPO jump is worth more to google in the long run than the hundreds of millions they didn't make by selling off shares.
That's my take, at any rate. Whether what they did is a good or bad thing depends on how you view the stock market's workings.
Winged Power Photography
The fact that Google were able to bypass so much of the existing IPO infrastructure upset the investment banks. Normally, the banks work on a principle that they can always unload the nut centres on the promise that the customer will get a couple of juicy soft centres next time round. There are many companies that would find an IPO much more difficult so the idea of having some 'sweeteners' around is always useful for them.
If the best looking issuers bypass this mechanism then the banks will have less of a possibility for unloading other shares.
See my journal, I write things there
If you own any mutual funds, you might want to look into what their behavior around the Google IPO was this week.
The IPO shares had a pop of about $13 on day one, which clearly indicates that there were a lot of people who wanted in on GOOG stock but didn't get it out of the Dutch Auction process so they were willing to offer a premium to the first Dutch Auction winners who were willing to sell and bank an instant profit.
I suspect that there were many "institutional investors" who boycotted the Dutch Auction simply because they didn't like it, as it takes the ability to bank instant profits away from them and instead gives it to the average investor. However, mutual fund managers represent a whole bunch of average investors at once... when they lose money, they're losing their customer's money.
If any of your mutual funds turned out to have paid more than the IPO price for GOOG stock yesterday, sell the fund today. Your manager spent some of your money trying to make the Dutch Aution process look bad. If he was willing to pay $95 per share for GOOG in the afternoon, he should have been willing to bid $95 per share in the Dutch Auction, which would have resulted in the same shares for less money.
The Dutch Auction is just a different way of doing an IPO, one that upsets the big boys because everybody gets to come out of the gate at the same time with no advantage for them anymore. This instant-pop seems to indicate that some people were waiting for GOOG to hit the NASDAQ system and not playing in the Dutch Auction, and if somebody was doing that in your name I don't think you want them controling your money any more.
Trust me - they won't make as much.
That jump creates a LOT of wealth. Take the number of issued shares and multiply it by the amount of jump - that is the cash the banker controls. They can keep some for themselves by putting the IPO money up out of their own pocket. They can steer it to preferred clients - thus guaranteeing that they'll have preferred clients who make them all kinds of money. They can give it to other IPO banks that will return the favor, etc.
Suppose you issue 100 million shares at $10, with 7% commission. That's something like 70 million in profit. Plus if the stock shoots up to $50 on the first day, you make an extra $5 billion - or at least you control who makes it.
On the other hand, going the google way they issue 100 million shares at $100, and get 2% commission. That's 200 million in commission - looks pretty good. Oh, but there is very little jump, and they have little control of who benefits from the jump even if there is a big one. So they made $100 million and lost $5 billion.
The jump is everything to an IPO banker.
And why does Google even pay 2% commission. If this continues you'll see that number drop even more. All the bank is now is a marketer and administrator - and you don't need to pay somebody $200 million to keep track of 100 million pieces of paper and cash all the checks...
Ok, I'm joking. My questions: did Google do something dishonest, or illegal? I don't know enough about IPO's to know.
No, nothing dishonest, not even unethical. In fact, you could go so far as to say they had the single most "honest" IPO in history.
Rather than the norm of paying a group of "experts" to decide a good starting price for their shares (which invariably results in those experts setting the price WAY too low so their buddies can all make a killing when the price goes up), Google basically asked the actual public what price they would pay to get a good estimate. Thus, Google made far more than they would have otherwise, while starting their stock at a realistic price. This annoyed the experts, their buddies, and all the middlemen who would have gotten a cut (by "a cut", read "the lion's share of the IPO").
The "controversial" drop in starting price you can consider an incredibly saavy move - It guaranteed that the price would go up a bit, but not so much as to get the same sort of unrealistic bubbles that killed so many dot-coms. Sort of a built-in reward for those who jumped in on the IPO, but not so much as to look unsustainable.
I don't quite understand the details of this part, but they somehow also managed to make sure that real people (rather than only Wall Street scum) could buy shares. Naturally, this caused a great deal of annoyance to the Wall Street scum who would normally profit from such an IPO.
Overall, they joined The System while telling The System to piss off.
As an aside, even for those who would fault them for bucking the system, I would point out that they only joined kicking and screaming. Because they had gotten so big, even if they had stayed private, SEC rules would have kicked in that provide all the hassle of public trading but none of the benefits. Almost like telling someone "You make the best widgets around, so we'll take them. We'll pay you if you want, but we take them either way".
Because investors generally expect a run up to compensate them for the risk of an IPO. Your understanding of a dutch auction is correct, in Google's case, they effectivly moved below the lowest bid range, and gave the same number of shares in smaller portion to more people. They had to have known that there was demand for 21 (or so million shares at $95-$100 million, and demand for 25 million at $85. So Google sold 21 million at $85 to give a gift to the IPO makers, not as bad as usual (More like Google sold stock to Alan for $900 million who sold it to Bob for a billion). And that ensures that Alan will be interested the next time the underwriters want to sell stock of a less famous company. To Google's benefit this was a smaller run up than usual, and the price rose over the course of the day.
Degaussing scares the bad magnetism out of the monitor and fills it with good karma.
Institutional investors stayed out of the auction, hoping that the IPO would fail for "ideological" reasons
Greed is a fluid ideology. It may have caused institutional investors to malign the auction process before it started, but it would also cause them to bid if they thought they could make a quick buck.
Apres moi, le deluge.
Milo
Heh, they'll be the good guys till profits level off and the board forces out the founders, bringing in soulless bloodsucking corporate old boys to ramp up short-term profits to make the day traders happy.
Sad, really,
-l
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