Friday, August 20, 2004

Jay Ritter on Google's IPO

Lessons of Google's Dutch auction

Well it is done. Unless you have spent the last 24 hours in on the moon with Ignignot and Err (bonus points if you get the reference :) ) or backcountry hiking, you probably have heard that Google did in fact go public yesterday. The shares were sold at $85 which was the lower end of the $85 to $95 price range (which had been revised downward--see Wednesday's blog entry)

In the secondary market the shares ended the day trading just over $100 a share.

So the obvious question has to be asked, is this better or worse than could have been anticipated had Google opted for a more traditional IPO. No more of an expert than Jay Ritter (who had worked with Google on the Dutch Auction IPO) has come to the quick conclusion that the choice of IPO process really did not matter.

Specifically he does not think the firm raised any more money, paid lower transaction costs, or resulted in more individual investors owning the firm.

(Note: several other sources, for example NY Post, disagreed with the last claim. However, I will go with whatever Ritter says until proven wrong with empirical evidence.)

It is also worth mentioning that in spite of the Dutch Auction which is designed to find the market clearing price, shares were rationed.

Overall, Ritter maintains that the Dutch Auction was the correct way to go since it could have raised more money than the traditional process. That things went poorly and they still raised as much as the more ordinary route suggests that more Dutch Auction was the right choice.

"Ritter's bottom line: We'll see more Dutch auctions in the future, particularly for companies that are as large, well-established, and widely known as Google. But they are unlikely to become the norm for the new issue market in general."


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