December 15, 2011
The IPO Dutch Auction: Should Facebook do a Google?
Posted by Christine Hurt

Usha has already blogged about the possibility of Facebook foregoing the traditional bookbuilding IPO in favor of an online auction.  In 2004, I first wrote on the online auction as an alternative to a traditional IPO in Moral Hazard and the Initial Public Offering.  At the time, I argued that online auctions could yield a higher price for the issuer due to the underpricing phenomenon.  However, after that article was published, online IPOs slowed to a trickle, absent the one highly publicized Google IPO, which was not technically a dutch auction at all.  (Here is a listing of all online auctions to date.  There have been no new IPO auctions since 2008.)  I wrote about the Google IPO in this article, What Google Can't Tell Us About Online Auctions (and What it Can). 

I finally came to the conclusion that auctions were great at capturing the market price of an issuer's shares, without the underpricing discount; however, investment banks are able to increase the market price so the end result to the issuer may be the same or greater.  This led to the third article, Initial Public Offerings and the Failed Promise of Disintermediation.  I think the Google IPO is a great example of this.  Google, which was just as hot in 2004 as Facebook is in 2011, believed quite correctly that it did not need Wall Street to sell its shares.  The public did not need to be sold on buying Google.  So, if you have the most fabulous house in a hot market, you can do FSBO.  But, Google actually needed Wall Street to buy, which didn't happen.  The larger institutional investors sat out and the analysts were very negative, rightly or wrongly.  Now, Google's share price has never looked back, so I'm sure Sergey and Brin aren't shedding any tears.  But, Facebook might think twice about deciding to go it alone on sheer Palo Alto power alone.

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