This is a continuation of my previous blog post about the Google IPO. There has been a lot of talk in the media recently about the upcoming Alibaba IPO, so I thought it would be interesting to analyze another very publicized IPO that happened about ten years ago– the Google IPO. Tech IPOs as big as Alibaba’s or Google’s don’t happen often, so Alibaba could learn some valuable lessons by looking to the past. The previous blog post described the structure of the Google IPO and this blog post will discuss the result + some of the successes and shortcomings of the IPO.
The Result of the Google IPO
In traditional book-built IPOs, large financial service providers (usually banks) partner with the company wanting to pursue an IPO and assess its worth in order to determine a share price for the IPO. These banks (referred to as underwriters) have an incentive to underprice the IPO offering price in order to guarantee that all shares will be sold.
Google, at least within the public eye, wanted to eliminate this tendency to underprice by using the auction format (discussed in previous post). Some good evidence for this exists in Google’s initial S-1 filings which read, “Buyers hoping to capture profits shortly after our Class A common stock begins trading may be disappointed” (Google Form S-1, note 238). Ultimately however, the results of the Google IPO auction were not analogous with Google’s stated goals. After uncertainty about the IPO grew due to concerns brought up by the SEC, Google adjusted its original price range of $108-$135 to $85-$95 per share, and later established a final price of $85 per share. Rather ironically, after the first day of trading had completed, Google’s share price rose from $85 to $100.34. Despite its unique structure, the results of the Google IPO seemed very similar to what would have occurred if Google had simply pursued a traditional book-built IPO.
After seeing the somewhat disappointing results of the Google IPO it is natural to ask what could have been done differently. Traditional game theory asserts that an auctioneer’s aims in an auction are five-fold: (1) to extract as much revenue as possible, (2) to allocate ‘prizes,’ or shares efficiently, (3) to gather accurate information about bidder’s valuations, (4) to encourage new bidders to participate in the auction, and (5) to attract attention to the auction. Based off of the results observed, it seems that Google only succeeded in achieving the fifth goal.
One possible improvement that could have been made is electing to enlist one experienced underwriter to lead the underwriting syndicate, rather than two inexperienced underwriters. Google chose Credit Suisse First Boston LLC and Morgan Stanley & Co. Inc., two of the leading investment banks in the U.S., to lead their underwriting syndicate. Unfortunately, neither of these banks had any experience with auction-based Internet IPOs. Electing one leading underwriter with more experience could have led to better communication between Google and the underwriter as well as increased efficiency in Google’s attempts to increase the pool of potential investors.
Conclusion: Same Result, More Hype
In conclusion, I think that Google’s goal for the IPO was to create more public excitement for the company. By using an untraditional IPO auction structure, Google was able to generate increased media attention and use its IPO as not only a catalyst for company revenue, but also as a largely effective marketing tool. Despite achieving similar results to traditional book-built IPOs, Google may have profited more from its IPO in the long run by generating new potential users and customers.
Furthermore, it is worth noting that Google did succeed in two of its initial goals: one, offering the shares to a larger group of people including private investors versus just financial institutions, and two, Google succeeded in paying a lower percentage to underwriters than experienced in traditional book-built IPOs. For a big tech company like Alibaba it may be wise to follow in some of Google’s footsteps as it prepares to hold its own IPO within the next month.