Saturday, August 21, 2004
Slate has an article called 'Four Ways Google Failed' (referring to it's IPO). The four reasons are mostly specious (it didn't netscape a bubble, vaporize 'evil' ibankers, prove the EMH, reform corporate governance).
I hate to rant, but this article really got to me. It just sounds so...European. The reason the States innovates is because even failure earns a reward. And, more to the point, success has a very serious reward.
In Google's case, there are many things it failed at - including doing my laundry. What it did succeed at is building a billion dollar business out of a few very simple and elegant thoughts.
Not to mention that the article contains some seriously wrong analysis:
"...What's more, yesterday some 22 million shares�more shares than were actually issued in the IPO�traded hands at an average price of about $100. So even though there were enough buyers willing to take the whole offering at $100, Google wound up accepting $85, leaving close to $300 million on the table."
Finance 101: The day after the IPO is not the IPO. Risk preferences change the day after the IPO. You cannot make this comparison at all.
Read Jamie Surowiecki's FT piece instead:
"...Wall Street can spin this however it wants. But Google went public without underwriting from a major investment bank, without handing out favours to well-connected executives and without dictating a price in the manner of Soviet central planners. Because it did, it now has hundreds of millions of dollars that it would not otherwise have had. By any standard, this was one IPO that worked."
But even yesterday, not even hour after the stock started trading (the chart i'm looking at seems to indicate 15-20 minutes), the price rose to just over $100. Granted, yes, the IPO and the market itself are going to have different preferences, but to me that much change in such a short time indicates the IPO itself was - as the article is saying - undervalued. Not necessarily by $15, but to some extent, as obviously the open market was willing to pay more even immediately after the offering.
I guess I'm not certain that the difference between the auction and the open market entirely accounts for the difference in pricing.
But what in particular about the dutch auction process allowed or enabled the underpricing of the stock to take place? Was it entry costs into the auction through the selection criteria brokers were required to use to pick eligible bidders (primarily a minimum net worth) that created that environment?
Anybody have a better explanation?
Hmm, flyingass, that's a good point - I didn't realize the pop happened in the first 15 mins.
My guess would be this is down to 2 effects. 1 - barriers to entry locked some people out of the market (as you point out); 2 - a lotta people experienced a kind of Loser's Regret.
Let's also bear in mind that no auction is going to be perfectly efficient, because transaction costs play a big role given the human nature of an IPO - so *some* money is going to get left on the table.
I think the big question to ask is to consider the counterfactual: is 15% (if we take the high end of the bid) more or less than would have been left on the table had Google gone the traditional IPO route?
History tells us that it most likely would have been more.
Actually, the point about the auction having locked out a number of people is a really good one. If I remember right, the auction was open to only US residents. That might've caused a significant number of foreigners to stay out of the auction and wait for secondary market trading to build their positions. Would be interesting to see hoo much net foreign investment went into the auction vs the open market.