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C. Unique Features and Stated Goals of the Google IPO

Instead of using the usual bookmaking process to determine the IPO price, Google used an

auction process.8 The auction mechanism was similar to a second price auction: there would be a single

market price with all bids above that price receiving shares at that price. However, unlike a second price

auction, Google reserved the right to set the IPO price below the market clearing price,9 creating excess

demand. In such a case, bid quantities would be used to determine actual shares allocated to successful

bidders using one of two pre-specified apportionment rules. This effectively limited discretion in the

allocation of shares. The Google IPO auction opened on August 13, 2004 and closed on August 18.

While IPO auctions have been common in other countries10 and the potential of using the Internet

to dis-intermediate U.S. IPOs has been discussed (e.g., Jenkinson and Ljungqvist, 2001, p. 9), the use of

an auction mechanism for an IPO of this size in the United States is novel. The major features of this

process were outlined in the initial filing on April 29 and refined throughout the amended filings. The

stated goal of the auction process was to set “an initial public offering price that results in the trading

price for our Class A common stock not moving significantly up or down relative to the market in the

days following our offering” (page 28 of the initial S-1 filing); “to have a share price that reflects a fair

market valuation of Google” (page v of the initial S-1 filing); and to avoid “boom-bust cycles” (page v of

the initial S-1 filing).11 Thus, the goal was to set the IPO price near the actual market price in the days

following the IPO, avoiding the typical underpricing that characterizes most IPOs. This would be

beneficial for Google. The typical 15% underpricing of IPOs in the United States and other developed

countries leaves a great deal of money on the table. If companies could set IPO prices closer to eventual

8 Interested readers can obtain details of the Google auction process from the prospectus available at the SEC through EDGAR (http://www.sec.gov/edgar.shtml) by searching for file number 333-114984. We note that Google defines market clearing as the bid price at which all shares, including the over allotment option, are sold. We will use the same definition. When we estimate the demand curve below, we are consistent with this. According to Jenkinson and Ljungqvist (2001) they have been common in Israel, England (in the 1980’s), and Japan (in the 1990’s). France uses a mixture of auctions and bookmaking. Sherman (2004) notes that IPO auctions have been tried in many countries, but have been abandoned in most. To further emphasize this objective , the prospectus and amendments also state “Our goal is to have an efficient market price—a rational price set by informed buyers and sellers—for our shares at the IPO and afterward. Our goal is to achieve a relatively stable price in the days following the IPO” (on page v of the initial S-1 filing). 9 10 11


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