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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."
Glad I'm not the only one who suspected this.
I think the strategy could actually backfire on Google - since decent short-term gains are now attainable, many bidders will cash out early (a scenario they were hoping to limit via the Dutch Auction process).
Just MHO, but it'll be very interesting to see where the stock heads in the coming weeks.
I find it ironic that the Google context-sensitive ad for this article is about making your website a "revenue generator"...
perl -e 'print $i=pack(c5, (41*2), sqrt(7056), (unpack(c,H)-2), oct(115), 10);'
My its sad to see all the people switch sides on Google since they finally decided to become public.
Google rocks, I hope they become really rich.
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/
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.
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".
Only 8.5% of the company is now held by investors.
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?
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.
19.8 million shares * $85 = 1.666 billion. Yep that's right: 666. What happened to 'Don't be evil'?
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...
It is very uncommon in an IPO to get even half of the bidded shares.
CBS marketwatch is just going along with the unhappy crokers / brokers that are not receiving their $1/share commissions because the Google guys decided to let you and I have a fair shot at investing in GOOG via a true public auction.
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.
from wail street weasels restricting IPO grants to buddies, setting the price at a high point from which they get rich, and the schlubs who didn't get initial grants of IPO stock when were sold side-by-side with the public offerings to provide a bonus on top of wonderful gifts from finance-world heaven get the shaft.
this way, everybody with a winning bid got stock, and had a chance to quick turn it around for a hot gain if they so desired.
backfire, hell, they did good and didn't lose hundreds of millions to the investment banks. go GOOG!
if this is supposed to be a new economy, how come they still want my old fashioned money?
So reading that I thought, I wonder if there will be a bunch of negative press about Google now? Since then, sure enough, nothing but negative press, rumors, bad mouthing. It's enough to make me wonder if the Wall Street crowd worked hard to make Google look bad so that other companies wouldn't do something similar. But I have no idea if this is accurate, or just coincidental. Anyone heard anything?
With people selling their shares only for a premium in ANY ipo, it's a mathematical certainty that a runup on the first day is completely inevitable regardless of the process used to doll them out. This is because those who sell shares will not do so on the first day unless a nice premium is paid, and there were many investors out there that wanted a piece of the ipo. Google was successful in that the IPO did not product catastrophic price raises (50%+) that others have seen. Mike Sklut www.vafrous.com
mix_master_mike
vafrous
Lowballing your IPO to ensure a 1st-day pop is OK. It provides a reward for those who bid, rather than "sit out" the IPO as many institutional investors did.
NOT being up front about it is not.
For example, they could've said (and I've simplified the #s) something like "we will sell 5 million shares and existing stakeholders up to 2 million. We will price our IPO at the bid of the 8 millionth share and allocate a 100% allocation to the bids for the top 5 million shares and a porportional allocation to the next 3 million shares."
If stakeholders sell only 1 million shares then the lowest-3-million shares will receive only a 33% allocation.
This would be nice and transparent, and would give an incentive to bid high.
Knowledge is how to play a game, intelligence is how to win, wisdom is knowing what game to play.
Whoever wrote this crap is a financial n00b. Google issued as many shares as they felt is best for their interest. The initial price of 105-135 was a pure speculation, it does not mean that IPO could bring in that price. This is not a lost opportunity cost. And finally, regardless the method of the IPO the price within a few trading days will settle to a fair market value.
What is a "Dutch Auction"? Does it have anything to do with dutch oven or going dutch? Or does it refer to the stock market in the Netherlands? Oh nevermind... the link finally came up.
Google is sitting on a pile of cash and rapidly growing earnings...
:)
GM is sitting in a saturated market, getting smacked around by foreign competition and high oil prices, and has an unfunded pension liability in the billions...
The REAL underfunding of the pension, if pension math wasn't SO rediculously warped as to make it look like it isn't a problem, GM is probably rightly valued at the price of Google... Remember, Assets = Liability + Owners (Shareholder's) Equity, OR, Shareholder Equity = Assets - Liabilities...
Sure GM has a LOT of assets, but they have a LOT of liabilities, some of which are hidden from the balance sheet by the insanity of pension math...
BTW: I think that Google and the Internet companies are RICHLY valued and priced for perfection... However, if they can MASSIVELY grow earnings over the next few years, they may grow into those valuations... i.e. grow earnings at 100% this year, and halve your P/E ratio, and the stock price is flat... Don't lose hype/momentum/confidence, and your P/E will shrink slower than that. By the time Google's P/E drops to "market averages" (when they aren't high-tech growth anymore, 15-30 years), they should have plenty of time to increase earnings to make up for it.
Alex
In the Google prospectus, they state that they can set the ipo price such that successful bidders recieve approximately 80% of stock.
https://www.ipo.google.com/data/prospectus.html
In the event that the number of shares represented by successful bids exceeds the number of shares we and the selling stockholders are offering, the offered shares will need to be allocated across the successful bidder group. We, in consultation with our underwriters, expect to use one of two methods to do so--pro rata allocation or maximum share allocation. With either method, our objective is to set an initial public offering price where successful bidders receive at least 80% of the shares they successfully bid for in the auction. We do not intend to publicly disclose the allocation method that we ultimately employ. Once we choose an allocation method, we will not change it.
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 $85 due to lower priced demand than anticipated.
The original poster was ignorant of how an IPO works with the claim that they netted a nice little gain after the IPO.
I happen to agree that the canadian system is better than the US system (I live in the US) but this is not typical. People in the US would tend to say their system is better and people in canada say theirs is. All this means is people in a democracy tend to be reletivly happy with the way their own governments do things.
"It is not how things are in the world that is mystical, but that it exists." -Ludwig Wittgenstein
Canadians have sort of the best of both worlds: they have socialized medicine at home, and are right next door to a capitalist medicine system if they want to use that. If socialized medicine was the only choice, and people couldn't go over the to US for treatment if they chose to, that might make at least some people less happy with the arrangement.
10 PRINT CHR$(205.5+RND(1)); : GOTO 10
There was an error this morning in which one of the brokerage houses let two trades go through early which resulted in the briefly reported $140 price. The NASDAQ announced that trading had not yet begun and it began trading at the opening price of $85 a little bit later in the morning. Since Yahoo's chart likely just grabs the data as it's seen and plots it, fixing this may be a manual thing. You can read about the error here.
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
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
Invade Canada.
paintball
Of course. It's just that now shareholders get to vote on their definition of "evil".
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.
Umm...repeated polls show that somewhere over 70% of Americans want universal healthcare, which is what Canada (and just about every other western nation) has.....
eat shiat and bark at the moon
For every incidence of hypochondria that you cite (which in effect is what you are saying) there is someone like me who refuses to see a doctor unless dragged in chains to the door of the office and then prodded by a bayonet.
Mods: How exactly is it insightful to suggest that everyone in the US is a hypochondriac anyway? Sounds like a bunch of European moderators this morning - woops, that's every morning.
The problem with your attitude is that you neglect the myriad cases where a GP can be a very useful triage device. The GP can identify those with bacterial infections that need antibiotics, which frankly is the only reason I go. The GP can tell you to go to the hospital.
Otherwise, who gives a shit how often the hypochondriacs go to the doctor? In the US we have enough GPs to handle triage. Sounds like Canada doesn't, to the detriment of their supposedly 'superior' health care system. Hint: it's only superior because they have ours right next door. If China were their next door neighbor I suspect things would be different.
HBI's Law: Frequency of calling others Nazis is directly correlated with the likelihood of the accuser being Communist.
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".
The way the Dutch Auction worked was that people
indicated what price they were willing to pay for how many shares. Once GOOG decided how many shares to sell, they counted down the bid shares from the highest prices until all were accounted for. Then they sold them all for that value. That means that since they sold for $85, everyone who got shares were WILLING to pay at least $85, and probably more! Since some people thought they were worth $85, while others thought they were worth more, the ones who thought they were worth less sold 'em to the ones willing to pay more, and the price/share went up.
That is largely affected by how many shares the company retains for itsself.
If the founders still control a majority of the shares and don't plan on dispersing them, then all they've really done is allow others to join them on the magical carpet ride, and to raise a lot of money for financing operations.
Wall Street doesn't actually get to say a damned thing about the operation of your business. They can expect things, and the analysts can say what they expect to see happen. Those expectations might affect buy and sell orders. [Which you correctly point out could cause a floundering company to do stupid things.]
As a matter of fact, since no large institutional investors were really involved in this, there isn't some big megacorp who can now say "OK, time to start being evil like everyone else is -- begin the baby-grinding operations".
If you had the scratch you could buy shares in Warren Buffet's company. You sure as hell can't tell him how to run his business because he retains a controlling share.
Now, if they keep dispersing shares and a large controlling stake ends up in the hands of someone who is all about corporate greed, what you say could happen.
But in general, going public to a degree isn't an automatic trip into corporate evils.
Lost at C:>. Found at C.
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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