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A CASE STUDY OF GOOGLE'S IPO-THE ADVANTAGES OF ONLINE AUCTIONS MAY BE MORE THEORETICAL THAN REAL
Is the online auction an efficient mechanism for pricing initial public offerings (IPOs)? Its intent was to minimize first day price surges in IPOs, which represented "money left on the table" for issuers. Evidence from Google's IPO suggests that the online auction process may not have minimized the first day price surge, since 82 percent of the IPOs issued in 2004 using the traditional process experienced less of an increase. Furthermore, a comparison of auction IPOs with traditional IPOs issued in the same year and in the same three-digit SIC code suggests that 44 percent of the auction IPOs have greater first day price surges than their traditional counterparts. A broader comparison of the pricing behavior of auction IPOs with traditional IPOs presents a mixed picture and suggests that the size of underwriter may be an important factor. The mispricing that occurs in auctions may be due to an informational asymmetry on the part of small investors. This informational gap could arise because small investors lack access to the information sources that institutional investors have or because companies are not required to provide detailed information in the online process, inas-much as they don't undergo the rigorous scrutiny of investment banks in the traditional bookbuilding process. This informational gap may be alleviated by the SEC reforms of the "quiet period" and by the issuer providing more detailed information on the uses of the funds.
The resurgence in the initial public offering (IPO) market in 2004 and 2005 raises questions of whether IPOs issued recently will develop pricing patterns similar to those exhibited by IPOs during the dot.com years and whether alternative IPO issuance processes, such as the online auction process used by Google, would provide more efficient pricing. The increase between the offer price and the open price for newly issued IPOs still remains a matter of concern, although these increases are not nearly at the levels exhibited by IPOs in 1999, when, for example, Enel, VA Linux, and Sycamore Networks experienced increases between their offer prices and their open prices of 966.9 percent, 896.7 percent, and 612.8 percent, respectively.
Critics of the existing IPO allocation process argue...