On August 20, a Wall Street Journal article (Lucchetti, Sidel and Simon, 2004) reported that
Turner Investment Partners bid for 1 million shares at $85 per share and received only 700,000 shares or
70% of its bid. Internet reports (e.g., Kawamoto and Olsen, 2004, www.buygoogle.com, 8/19/04, and
messages at the Google Stock discussion board at http://www.google-ipo.com) suggest that small bidders
were also rationed and put the percentage at up to 75%. This indicates that Google used the pro rata
allocation process, which means that the quantity sold (22,545,809 shares including the over-allotment
option) was 70%-75% of the total bid quantity at the $85 price. This would imply total bids of
30,061,079 to 32,208,299 shares at or above $85 per share (i.e., an excess demand of 33.3% to 42.9% of
the quantity sold).27 These allocations are consistent with significant underpricing.
Publicly available data allows us to approximate two apparent points on the demand function.
Investors were willing to buy roughly 30 million shares at a price of $85 according to the allocation
information available. The next day’s opening price implied that they were willing to buy the actual 22.5
million shares (including the over-allotment option that had been issued) at about $100. Assuming
overnight information changed the demand curve little, we can estimate the demand curve. From this, we
can determine whether Google could have expected to sell 19.6 million shares at the IEM suggested price
of $104.34.28 Solving for a linear demand curve (as an approximation) given the two points ($85, 30
million) and ($100, 22.5 million) gives a demand curve of QD = 72.5 million – 0.5P. Using the IEM
suggested price of $104.34 yields a predicted sales quantity of 20.33 million > 19.6 million. A constant
elasticity demand curve (fit to the same data points) gives a predicted sales quantity of 20.10 million >
19.6 million. The estimated demand curves are shown in Figure 5. Overall, the information available
suggests that the IEM implication of foregone revenues of greater than $300 million (see Table II below)
22,545,809/0.75=30,061,079 and 22,545,809/0.70=32,208,299. (30,061,079-22,545,809)/22,545,809=33.3% and (32,208,200-22,545,809)/22,545,809=42.9%. The original 19.6 million includes all of the shares issued by Google itself. The over-allotment option was filled completely by existing shareholders. So, how much of the over-allotment option that would have been exercised at the IEM price is irrelevant to the proceeds raised by Google itself.