February 23, 2005
Was the Google IPO a Marketing Gimmick?
Posted by Victor Fleischer

I taught a really fun seminar session today on the Google IPO. Last summer Google used a Dutch Auction to sell shares to the public in its IPO. Google democratized the IPO process: anyone with a computer could participate, and the Dutch Auction method cured the underpricing problem that plagued IPOs during the Bubble. Google wasn't beholden to Wall Street. But wait a minute. None of that is true. Retail investors faced substantial difficulties in participating. The auction process was confusing, and many banks required large minimum account balances before you could place a bid. Rather than going with Hambrecht, who had experience with Dutch Auctions, Google went with a traditional syndicate of top tier investment banks. And instead of using the Dutch Auction as a price revealing mechanism, they underpriced the offering anyway by about 18%. So the underwriters had some nicely underpriced shares to give out to their friends. So what's the real story? In a paper I'm working on, I argue that the deal structure was a marketing gimmick: The Dutch Auction allowed Google to look like they were thumbing their noses at Wall Street without actually doing so. The appearance of independence from Wall Street was important in the post-Enron era. They generated great buzz about their IPO in a tough market for IPOs. And they quite rationally cared more about getting attention for the company than getting the right price for the IPO. It's brilliant. They played ball with the top tier I-banks, who are now providing some nice price support for the stock as insiders continue to sell. Whatever the originial intentions of the founders, the public benefited as well, since Google has made it easier for future companies to use the Dutch Auction process. I'm stuck on one point, though: are there other examples of deal structure as a marketing gimmick? If anyone has thoughts, please drop me an email at fleischer at law.ucla.edu.

The best I can come up with for other examples of deal-structure-as-marketing are earlier dot com IPOs. Before the bubble burst, dot coms routinely went public early. It wasn't about getting cash for the company -- VCs were ready willing and able to provide more capital. And it wasn't just about founders cashing out. A big pop on the first day of trading generated much needed buzz for the company -- a huge pop guaranteed coverage in the financial press, CNBC, and undoubtedly generated internet traffic. Maybe it was a little crazy, but given the crazy circumstances I suspect the marketing effects of an IPO were important to the companies.

Another example might be tracking stock, which never made much sense to me. With tracking stock, a parent company issues shares that track the performance of a (high profile) sub without giving those shareholders any real claims on the assets of the sub.

Or maybe poison pills, which are sometimes advertised as being good for employees and other stakeholders.

Any other ideas of deal structures that don't seem to benefit anyone in the deal itself but generate good buzz for the actual operations of the company?

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