• Save
Going public   two different approaches
Upcoming SlideShare
Loading in...5
×
 

Going public two different approaches

on

  • 1,655 views

 

Statistics

Views

Total Views
1,655
Views on SlideShare
1,655
Embed Views
0

Actions

Likes
2
Downloads
0
Comments
0

0 Embeds 0

No embeds

Accessibility

Categories

Upload Details

Uploaded via as Microsoft PowerPoint

Usage Rights

© All Rights Reserved

Report content

Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
  • Full Name Full Name Comment goes here.
    Are you sure you want to
    Your message goes here
    Processing…
Post Comment
Edit your comment

Going public   two different approaches Going public two different approaches Presentation Transcript

  • Copenhagen Business School
    Topicsof Finance – F87
    11-30-2010
    GOING PUBLICTwo different approachesBookbuilding Vs. Auction
    Pandora and Google case studies
    Sheila Jolin - Francesco Neri
    David Östblad - VedranKontic
  • TABLE OF CONTENTS
    Introduction to IPOs
    Pandora´s IPO
    IPO process
    Price setting mechanisms
    Information asymmetry and uncertainty in IPOs
    Bookbuilding Mechanism
    Post-IPO activities
    The syndicate
    Google´s IPO
    Dutch auction process
    Did Google succeed?
    Conclusions
  • WHAT IS AN IPO?
    INITIAL PUBLIC OFFERING
  • An IPO is the first sale of a company’s shares to the public and the listing of the shares on the stock exchange
    Our presentation will not focus on:
    Seasoned equity offering (SEOs)
    Right offerings
    We want to focus on explaining how different options the companies have when they decide to go public for the first time – and how the different mechanisms work.
    In both SEOs and Right Offering price is publicly available since the company is already in the market.
  • WHY DO COMPANIES GO PUBLIC?
    The first reason is “CASH”
    From company perspective
    From shareholders perspective
    • To get an equity capital infusion to fund new projects
    • To improve credit standing
    • Acquisition currency (for a stock payment to be accepted, the shares of the acquiring firm need to be listed)
    • Management compensation (stock options)
    • Take advantage of favourable market conditions
    • Reputation
    • Expand the basket of funding sources to support growth
    • To get liquidity
    • To deal with the transfer of control – such as succession of the first entrepreneurial generation.
    • To facilitate the acquisition of the company for higher value
    • For private equity firms is one of the favorite exit strategies
    • When the government is the shareholder, IPO means privatization and cash injection
  • IPOs ARE COSTLY
    • Direct costs
    Fees paid to lawyers, accountants, consultants and investment banks
    • Indirect costs:
    Increased formalization in the decision process
    Resulting burden of disclosure requirements and compliance costs
    Increased pressure for short-term performance
    Underpricing
    • Risks
    Exposure to takeover
  • PANDORA IN A FEW WORDS
    Pandora designs, manufactures, markets and sells handmade jewelry all over the world. In 2009 it was one of the third largest jewellery brands in the world in term of estimated retail revenue. The company is represented in more than 40 countries across six continents. The 65% of turnover is realized outside Europe.
    Private Equity firm
    AXCEL acquired 60% of Pandora from
    the Enevoldsen family
    Established In CPH by
    Per & Winnie Enevoldsen
    Started manufacturing
    In Thailand
    New marketsUS. Germany
    Australia
    IPO on Nasdaq OMX
    Copenhagen
    2003-04
    2008
    2010
    1989
    1982
    Generated revenue (2009) - DKK 3,5 billion (EUR 465 m)
    EBITDA (2009) - DKK 1,6 billion
    EBITDA Margin 45%
    EARNINGS (2009) – € 135 m
    Generated revenue (H1 2010) DKK 2,6 billion (EUR 345 m)
    EBITDA (H1 2010) app. DKK 1 billion
    Pandora A/S employs 4.500 people worldwide (3.300 in Thailand) 
    Source: Pandora
  • PANDORA’s IPO
    The IPO consisted of approximately 44.6 million existing shares.
    Approximately 2.7 to 3.4 million new shares, plus 6.7 million existing shares which is an overallotment option.
    In the end 2.9 million new shares were established.
    Free float = 36%
    OWNERSHIP STRUCTURE
    Before the IPO
    Without the Greenshoe
    After the Greenshoe
    Source Pandora
    FAMILY & EMPLOYEES
    AXCEL
    OTHER
    NEW SHAREHOLDERS
  • PANDORA OFFERING STRUCTURE
    Which shares?
    Primary offering
    Secondary offering
    Combination
    Which market?
    • Home market
    • Foreign market
    • Multiple listing
    Nasdaq OMX
    Copenhagen
    To whom?
    • Public offering
    • Private offering
    • Retail tranche
    • Institutional tranche
    The existingshareholders sold part oftheirshares
    2,9 mof share werenewshares
    Where?
    • Domestic offering
    • International offering
    The distinction is not related to the market of listing
    International institutional investors
    Retail tranche (only 5%) composed by Danish investors
    The offering attracted strong interest from investors both in Denmark and internationally.
    The deal was at least three times over-subscribed.
  • ACTORS
    Global coordinator
    Investment Banking – Equity capital market - Sales
    Institutional investors
    Company shareholders
    Syndicate of banks
    Financial advisor
    Specialist
    Sponsor
    Shareholder advisor
    Legal counseling
    Auditor
    Communication department
    Retail investors
    Issuer / Company
    Supervisory authority
    SEC in the US
    Finanstilsynet in DK
    A company is responsible for the organization and management of the stock exchange
    (NASDAQ OMX)
    • Prospectus Presentation/Bookbulding opened – Sept. 23 2010
    • Bookbuildingclosed/Allocation – Oct. 4
    • Tradingstarted – Oct. 5
    IPO PROCESS
    PANDORA
    4-6 months before the offering
    After the offering
    1-2 weeks before
    2 months before
    Preparation
    • Due diligence
    • Applies for listing to the market authority and to the stock exchange
    • Preparing documentation
    • Drafting prospectus
    • Communication plan
    • Informal presentation to the supervasory authority
    Planning
    • Identification of the objectives
    • Choise of the market of listing
    • Choice of the Global Coordinator
    • Preliminary valuation
    • Timetable and scheduling
    Definition
    • Demand estimation
    • Offering deminsion
    • Definition of the acceptance period
    • Contacts for the syndicate
    • Filing
    Marketing
    • Communication Campaign
    • Circulation of equity researches
    Offering
    • Admission by the market authority
    • Prospectuspresentation
    • Roadshow
    • Bookbuilding
    • Price setting
    • Allocation and allotment
    • Greymarket
    • Payment and consignation
    Aftermarket
    • Greenshoe
    • Stabilization
    • Market making by the specialist
    • Investor relation activity starts
  • Preparation face
    Immediately after the decision to go public is taken, the preparation of the prospectus and the related “due diligence” begins.
    The prospectus includes:
    Full disclosure of the company business
    The strategy of the company
    Its competitive advantage
    Quality/experience of the management
    The use of proceeds
    Correct representation of facts and risks
  • Approaching The Market
    Pre-marketing
    The global coordinator will informally solicits institutional investors to get their “feelings” about the issue (eg. “Pilot Fishing”: with this practice the bank conducts a confidential pre-sounding of a planned IPO with some key investors).
    Price range setting
    The valuation will reflect the sentiment assessed during the pre-marketing step.
    Presentation - “Roadshow”
    The management of the issuing company and the investment bank present the issue to institutional investors in the major European centers - for larger offerings it usually takes one week in Europe and one week in the US.
    During the roadshow period non binding bids are requested and the book is built.
  • Going Public
    Investors
    Wants to make a good deal, through high yield
    Issuer
    Wants to maximize the proceeds
    Opposite interests
    The global coordinator
    Is in between
    Allocation of shares
    • Within the institutional tranche allocation is usually made on a discretionary basis.
    • Within the retail tranche the allocation is made on a non-discretionary basis (like pro-rata basis)
    Price setting
    When the books are closed the bank and the issuer set the offer prize
  • PRICE SETTING PROCESS
    COMPANY VALUE
    Price range for book building
    Offering price
    The syndicate’s tasks:
    • Information production
    • Certification and reputation
    • Create and stimulate a demand
    Book
    building
    ValuationMethods
    • DCF
    • Comparables
    Preliminary valuation
    Due diligence
    Fair value val.
    Pre-marketing
    Roadshow
    TIME
    Pricing
    2 – 4 months before
    1 – 3 months before
    1 month before
    2 weeks before
    2 – 3 days before
    First meeting with
    the company
    Source JP Morgan
  • PRICE SETTING MECHANISMS
    Open price book building
    (Only institutional investors)
    Suggested price range
    Investors are asked to provide non-binding indications of interest
    The book is built
    The terms of the offering are determined according to the book
    The syndicate underwritesthe shares:
    • Firm commitment
    • Best effort
    Fixed price
    Offer price is set by issuer and Global Coordinator before bids are submitted
    The Global Coordinator underwrites the offer (Firm Commitment)
    The Global Coordinator puts its best effort to sell shares (best effort)
    Auction
    Investors are invited to an auction where they bid for shares
    A market clearing price is set after bids are submitted
    Two types of action:
    Price -discriminatory
    Uniform-price
    Once the offer is covered, shares are allocated at a single clearing price
    Since 1998, the US Treasury used this format to sell all of its bonds, notes and bills.
    Key feature:
    Allocation of shares among institutional investors is decided by the Global Coordinator on a discretionary basis
    Key feature:
    Allocation of shares among investors are decided on a non-discretionary basis
    Despite the lack of transparency, it is the most common approach
    METHOD USED BY PANDORA
  • Setting the right price is problematic!
    Information asymmetry
    AUCTION
    Winner curse risk
    The winner risk paying too much – because the value of the asset it lower than the winner anticipated
    OPEN PRICE-BOOKBUILDING
    Neither the issuer nor the underwriter can know precisely what the market valuation will be.
    Investors have no incentive to reveal positive information before the stock is sold.
    Example: estimation of the value of an offshore oil field.
    • Intrinsic value = $10 m.
    • Bidder A estimates $5 m.
    • Bidder B estimates $20 m.
    Bidder B wins, but overpays 10 m.
    Risk of underpricing
    On average the closing market price on the first day of trading is higher than the offering price. This has a negative effect on the wealth of the pre-issue shareholders.
    Shareholders leave ”money on the table”
  • THE MARKET’S PROBLEMS WITH THE PRICING OF IPO
    Firms that issue during low-volume periods usually experience neither high initial overpricing nor subsequent long-run underperformance
    Monthly data
    Cycles in both the volume and the average initial return
    Periodof “hot issue”
    Monthly data
    During periods of over-optimism many firms rush to market – this could results in disappointing returns in the long term
    Source: Ibbotson, Sindelar, Ritter (1994)
  • The underpricing phenomenon exists in every nation with a stock market, although the amount of underpricing varies from country to country
  • OTHERS REASONS FOR POSITIVE INITIAL RETURNS
    What happened in
    1999-2000?
    Why underprice an IPO during a bubble?
    • Some investment banks allocated underpriced shares to specific investors in return for business
    • Maybe IBs did not want to take advantage of a crazy market
    • IPO is also a marketing event
    Source: Loughran, Ritter (2004)
    • Dynamic Information Acquisition Investment bankers underprice IPOs to induce regular investors to reveal information during the pre-selling period
    • Information Cascades Potential investors pay attention to whether other investors are purchasing
    • Enhancing Relation with Investors Underpriced new issues leave a good taste with investors, allowing companies to sell future seasoned offerings
  • ACTORS
    Global coordinator
    Investment – Equity capital market - sales
    Institutional investors
    Company shareholders
    Syndicate of banks
    Financial advisor
    Sponsor
    Specialist
    Legal counseling
    Communication department
    Retail investors
    Shareholder advisor
    Auditor
    Issuer / Company
    Supervisory authority
    SEC in the US
    Finanstilsynet in DK
    A company is responsible for the organization and management of the stock exchange
    (NASDAQ OMX)
  • BOOKBUILDING – THE SYNDICATE
    The Global Coordinator forms a syndicate of banks to assists in the offering
    • Pricing
    • Underwriting
    • Distribution
    The issuer selects the Global Coordinator
    (and eventually one/more co-managers)
    A typical syndicate is composed by three parts:
    • MANAGING GROUP (Global Coordinator/Book-runner and Joint Book-runner(s))
    The Book-runner is responsible for the due-diligence, roadshow, book-building, allocation and gets the largest proportion of fees .
    • UNDERWRITING GROUP(Managing group and non-managing underwriters).
    • SELLING GROUP
    The banks in the selling group put their best effort in selling the shares, but they don´t underwrite them.
    FUNCTIONS OF THE SYNDICATE
    • INFORMATION – pricing is ”part art and part science”
    • CERTIFICATION – banks’ reputation reduce uncertainty
    • RESEARCH – aftermarket analysts coverage
    • MARKET MAKING – traders guarantee liquidity
  • Price setting process
    COMPANY VALUE
    Pandora
    DKK 210 per share
    Price range for book building
    P/E2010 = 13
    The syndicate’s tasks:
    • Information production
    • Certification and reputation
    • Create and stimulate a demand
    Book
    building
    Offering price
    PANDORA PRICE RANGE
    DKK 175-225 per share
    Preliminary valuation
    Due diligence
    Fair value val.
    Pre-marketing
    Roadshow
    TIME
    Pricing
    2 – 4 months before
    1 – 3 months before
    1 month before
    2 weeks before
    2 – 3 days before
    First meeting with
    the company
    Source JP. Morgan
  • BOOKBUILDING-PRICING
    Information is crucial to set the price and investors have information (HARD and SOFT) that can resolve the uncertainty concerning the price.
    The use of strategic pricing and allocation policy can offset the investors’ incentive to understate their interest in an IPO
    A large amount of bids would be excluded
    Just a small amount of bids would be excluded.
    More heterogeneous group of investors
    Demand
    No. of share (m)
    Underpricing is reduced
    The expected underpricing would be much higher
    Offer (fixed)
    Offering Price (€)
    Source: Forestieri (2008), Jankinson and Jones (2007)
    A good compromise
    For Pandora was 210 DKK
    € 9,1
    € 7,6
    This demonstrates how the allocation among the institutional tranche on a discretionary basis works. The offering price is set not only on the basis of the intrinsic value of the issuer and the market conditions, but also on the basis of which investors the Global Coordinator wants to favor. The reward to investors consists in larger allocation of underpriced shares.
  • How do inst. investors submit their bids?How do they provide information?
    An Example of book
    THREE TYPES OF BID:
    Request of shares (or amount of money) regardless of the issue price
    A demand schedule as a step function (partial demand curve)
    Specifies the max. price that the bidder is willing to pay
    Source: Iannotta (2009)
    • A Strike Bid doesn’t provide so much information about the demand sensibility to price
    • A Step Bid, by the contrary, reveals the investors’ elasticity to the offering price
    • A Limit Bid is in the between
    • Investors are allowed to revise their bid and this has a strong informational value (see Bid no.2)
  • Empirical Evidences about Bookbuilding and Allocation
    The issue price is not set according to any explicit rule, but rather based on bankers’ interpretation of investors’ indication of interest. They generally set the price at a level at which demand exceeds supply, and then allocate shares to the bidders at their discretion.
    • Countries that use bookbuilding typically have less underpricing than countries using fixed-price offerings
    • Investment bankers award more shares to bidders who reveal information through limit bids.
    • Bidders who participate in a large number of issues receive favorable treatment in the allocation of shares.
    • Investment bankers favor insurance companies and pension funds, which are usually considered long-term investors.
    • On average, 30% of bidders are not allocated shares.
    • Limit bids are favored relative to strike bids. Step bids are even more favored.
    • Large bidders are awarded with a larger fraction of their bids compare to small bids.
    • Underwriters favor high frequently bidders relative to medium-frequency bidders who are in turn favored relative to low-frequency bidders.
  • PANDORA UNDERPRICING
    Underpricing after first day = 25 %!
    Money ”left on the table” = DKK 2,13 billion
    Source: Datastream
    Underpricing refers to the price run up of IPO on the first-day of trading
    Underpricing = (First-day closing price – Offering price)/Off. Price*100%
    Money left on the table= (First-day closing p. – Offering p.)*N° of shares
  • STABILIZATION – THE GREENSHOE OPTION
    STABILIZATION is “the buying of security for the limited purpose of preventing or retarding a decline in its open market price in order to facilitate it distribution to the public”
    To assist in the stabilization effort the IB may overallot shares to investors (usually 15%)
    The bank overallots shares creating a SHORT POSITION
    Global
    Coordinator
    Issuer
    Selling Shareholders
    Grant an option to purchased share in the following 30 d.
    GREEN SHOE OPTION
    Strike Price = Offering Price
    The option is granted for free
    THE BANK HAS TO GIVE BACK THE SHARES BORROWED
    2 Possible scenarios
  • The Global Coordinator has an option to increase the issue size (no. of shares sold) in case of high demand.
    By the contrary in case of low demand, the investment bank can decrease the issue size buying shares on the market.
    GREENSHOE OPTION – THE TWO SCENARIOS
    THE PRICE DROPS
    THE IB BANK BUYS SHARES IN THE MARKET
    hoping to reverse the fall
    IN SUMMARY
    Price
    • 6,68 m additional shares (14%)
    • Strike price: DKK 210 (= Offering Price)
    • Option exercised until November 4th 2010
    PANDORA
    Green Shoe Option
    210
    The IB delivers the shares borrowed
    THE OPTION IS NOT EXERCIZED
    • Option fully exercised on October 8th 2010
    • Total amount of shares sold: 54,17 m
    • Total proceeds: DKK 11,36 m
    • Contrasting the price decline
    • Leaving less shares in the market
    • Profit for the IB
    Results
    b) THE PRICE RISES
    THE IB BANK exercises the Green Shoe Option
    1
    3
    4
    2
    5Weeks
    THE IB COVERS ITS SHORT POSITION WITHOUT COSTS
    THE DEAL WAS A SUCCESS
    • Contrasting the price raising
    • Leaving more shares in the market
    • The IB gets more fees
    THE BANK GIVES THE PROCEEDS OF THE OVERALLOTTED SHARES TO THE ISSUER
    Results
  • Valuation of Pandora – DCF Model
    Very low leverage
    Net Debt/Ebita < 1
    SELL recommendation!
    Source: JyskeBank
  • SYNDICATE COMPENSATION
    finaloffering price
    -
    price the membersof the syndicatepayfor the shares
    Remunerationprovidedfor the benefit of the “management group” for the organizationof the deal
    Differences in IPOs’ feesaround the world (Gross Spread averagevalue)
    Management fee
    On average 20% – 25%
    US
    5-7%
    8% of Global IPO ($)
    18% of fees
    UK - EU
    3 - 4,5%
    China – India
    0,75-1%
    50% of Global IPO ($)
    Only 38% of fees
    Remunerationfor the underwriting serviceprovidedby the bankswhichguarantee the sucessof the IPO
    Hong Kong
    2-3%
    Gross spread
    100 %
    Underwriter fee
    On average 20% – 25%
    The 7% spread and the 20/20/60 division are the industrystandars
    Remunerationfor the sale service providedby the bankswhichcontribute in the allocationofshares
    Selling fee
    On average 50% – 60%
    Source: Financial Times
  • The SyndicateThe distributionofFees - Example
    Source: Pandora
    The Lead Manager gets 50% of the management fee, 32% of the underwriting fee and 76% of the selling concession. This is consistent with the lead manager’s considerable discretion in the allocation of sales credits.
    Source: Torstila (2001)
  • Google
    Dutch Auction Case
  • WHY GOING IPO IN 2004?
    Source: Google
    In 2004 Google expected very high performance in the coming years.
    The launch of GMAIL to enhance the search engine.
    To realize their vision: “organize the world's information and make it universally accessible and useful”. Google needed more resources to grow in the future.
    Google’s owners wanted to provide employees with an option to convert their holdings in Google for cash.
  • THE IPOS’ MARKET IN 2004
    Source: Ritter (2009)
    • Google lagged behind the high-tech wave of the 1990’s. This was a period when its competitors went public in the hottest IPO period in history. At that time Google were still on the verge of ”becoming” a company.
    • In 2004 the financial markets started to recover from the dotcom bubble, however the number of IPOs was still low . This made even more difficult to value a new technology firm like Google. Moreover, instability in the financial markets increased downward pressure on price demanded from underwriters.
  • DUTCH AUCTION, WHY?
    Google owners being eager to maintain control of the company decisions, including the IPO. Usually Wall Street firms control the entire IPO process.
    Google further wanted a more egalitarian IPO (i.e. that anyone can be allocated shares). The IPO process was designed to be inclusive for both small and large investors (ipo.google.com).
    Apply disclosed and equitable allocation process at the cleaning price – Transparent price mechanism.
    The goal was to have a share price that reflected an efficient market valuation of the company
    Google wanted minimize the risk of underpricing, unresonable speculation, price volatility, small initial free float by the use of a Dutch Auction.
    Even if an auction was an unusual process for an IPO in the US, they wanted lo leverage on their previous experince with auction-based advertising system.
    Google decided to use the action process because it had waited six years until it was well established, became a household name and had a record of positive earnings.
    The Dutch auction would have allow Google to reduce administrative fees by having a internet-based bidding process.
  • What’s the experience with Dutch auction IPOs?
    • W.R. Hambrecht & Company developed an Open IPO format that was an adaptation of the modified Dutch auction with uniform price. They have administered both OpenIPOs and OpenFollowOn offering.
    • Some issuers have fared well in the after market and some have struggled.
    • Only subsequently the issuer and its bankers were allowed to reduce the offering price, notwithstanding the cleaning price determined in the auction.
    • April 1999 Ravenswood winery
    Clearing price = $10,50
    First day closing = $10,88
    • June 1999 Salon.com
    Clearing price = $10,50
    First day closing = $10
    • May 2002 Overstock.com
    Clearing price = $13
    First day closing = $13,03
    • December 1999 Andover.net
    Clearing price = $18
    First-day closing price= $78,81
    These cases indicate that the clearing price correctly anticipated open-market valuation.
    Despite the alleged benefits, only nine public offerings under the OpenIPO format have been completed since 1999.
    Source: Hild (2008)
  • DUTCH AUCTION PROCESS
    Like in the book-building all shares will be sold at the same initial public offering price
  • How did the Dutch auction process work?
    Example of Google’s Master Order Book
    Each BID should have included:
    • No. of shares the investor was willing to pay
    • Price per share the investor was willing to pay
    The auction assessed the market demand only for the Class A common stock.
    The Clearing price is the highest price at which all the shares offered may be sold to potential investors.
  • Source: www.google-ipo.com
  • Example of the Pro-Rata Method
    All investors who had submitted and not withdrawn bids with a price per share that was equal to or greater than the initial public offering price were eligible to receive an allocation of shares .
    Successful bidders will receive share allocations on a prorata basis
    No. shares offered
    No. shares represented by valid bids
    Allocation %
    ×
    Shares Representedby Successful Bid
    Source: GoogleAmendment No. 1 TO Form S-1
  • Process
    Advantages
    Disadvantages
    • Google IPO was presented as an opportunity for the masses,
    however the 5-share minimum bid empowers ”large investors”
    The eligibilty requirements was very abstract. Some
    underwriters required questionnaires, account amount
    minimum of 100K and some bids rejections were unclear.
    • The bidders have a “professional” investor status,
    as a result bids are more informed (i.e. value of
    security more based on fundamentals).
    Qualification
    Process
    • In Dutch auctions investors have an incentive to bid higher than fair value of stock (i.e. to secure getting stock).
    Required Informed bids and rejecting bids diminish this risk of winners curse and speculative frenzies.
    • In the Dutch auction the price is only determined by the demand. In case the issuer doesn´t reserve the rights to set the clearing price, the total proceeds depends greatly on the distribution of high/low bids.
    • The auction process required a minimum level of participation.
    Bidding and
    auction
    closing
    Process
    • As Google decided the final clearing price and shares offered, there was a risk that its subjective view on its book/company value might have negatively influenced the price setting.
    • The action process usually encouraged a speculative frenzy and a distruptive backlash immediately after the start of trading.
    • Avoids potential underwriters discount.
    Google used an auction mechanism to gather
    information on the value of its share. Multiple
    revisions of price range made it possible
    for Google to create “time-based”pricing as they
    can adjust price in terms of current demand.
    Pricing Process
    • Googles allocation system didn’t reward for
    placing high bids as the allocation of shares to successful bidders was in a equal manner.
    No bias in deciding on who should get the shares, which can happen in the traditional approach.
    • No selection of investors in the allocation process can increase the risk of investors focused on short-term valuation, thus, creating strong fluctuation/disruptions on the price of share.
    Allocation
    Process
  • PERFORMANCE EVALUATION
    P
    = 50
    E
    A price many analysts deemed too high
    The underpricing of 18% was very close to the average 18,8% first-day return of US IPOs during the period 1980-2001, but lower relative to other Internet IPOs, especially those that went public during the IT bubble (1999-2000).
    The auction failed to achieve a fair market valuation for Google. However Sergey and Larry were able to maintain the control of the process (i.e. avoiding middleman in final decision making) and to create an “open IPO”.
    The Wall Street firms co-managing the deal received less than half of their usual fees (2,8% of the revenue raised).
  • During the first year after the IPO, Google´s stock more than triplicated.
    The stock has never been traded below the offering price of $85
  • POTENTIAL REASONS FOR GOOGLE’S OUTCOME
  • CONCLUSIONS
    • Based on our research, we can conclude that IPO underpricing can happen regardless of whether issuers use the auction or the bookbuilding process.
    • Despite theory argues that the Dutch auction improves both pricing and allocation, U.S. issuers have been slow to use any auction format. Since 1999, only nine firms have used the OpenIPO format.
    • The features of the Dutch auction may not be benefits at all:
    Uninformed investors participate in the process
    A minimum participation level is required in order guarantee efficiency
    Maybe ”the highest price” strategy is not the best one in an IPO.
    • It seems useless to us that a company use an auction instead of a classical bookbuilding method since the issuer has the possibility to reserve the right to sell shares at below the market clearing price
    These reasons explain why the bookbuilding approach still dominates, despite the fact it is more costly and it lacks trasparency in both pricing and allocation.
    Since an IPO is a very critical event for a company and the information asymmetry plays an important role, the intermediation of the global coordinator and the syndicate is hard to replace.
    Finally, the bookbuilding method might be the only option that a company has in order to go public, especially in the case when the firm is not well-know.
    The auction process can be implemented successfully in SEOs and debt offerings.
  • REFERENCES
    Iannotta, G. (2009). Investment Banking. A guide to Underwriting and Advisory Services. Springer-Verlag Berlin Heidelberg, 44-98.
    Cornelli, F.& Goldreich, D.(2001). Bookbuilding and strategic allocation. Journal of Finance, 56, 2337-2369.
    Booth, L. The Costs of Going Public: Why IPOs Are Typically Underpriced. QFINANCE
    Berkeley, A.J. (2005). Some background and Simple FAQs about Dutch Auctions and the Google IPO.
    Torstila, S. (2001). The Distribution of Fees Within the IPO Syndicate. Financial Management, 5-23.
    Ibbitson, G.R., Sindelar, L.J., Ritter, R.J. (1994). The Market’s Problems with the Pricing of Initial Public Offerings, Journal of Applied Corporate Finance, 1, 66-74.
    Benveniste, L.M. (1989). How Investment Bankers Determine the Offer Price and Allocation of New Issues. Journal of Financial Economics, 24, 343-361.
    Hild, M.(2008). The Google IPO. The Journal of Business & Technology Law, 3 n°1, 41-59.
    Anand, A.I. (2005). Is The Dutch Auction IPO a Good Idea?. Center of Law, Economics and Public Policy, Yale Law School.
    Forestieri, G. (2007). Corporate and Investment Banking, Egea.
    Vise, D., Malseed, M. (2007). Google story. Egea.
    Hansell, S. (May 10, 2004). For Google, Going Dutch Has Its Rewards And Its Risks. The New York Times.
    Page, L., Sergey, B. (2004). Founders’ IPO Letter. S-1 Registration Statement.
    Pandora A/S. (October 2010). Company Announcement. No.1 (http://investor.pandora.net/)
    Pandora A/S. (September 2010). IPO Prospekt. (http://investor.pandora.net/).
    Thomsen, H.J. (14/10/2010). Pandora Equity Research. Jyske Bank.
    www.investor.google.com