Fixed Price Offerings Bookbuilding Information acquisition (Benveniste and Spindt (1989)) Agency problems (Loughran and Ritter (2002, 2004)) Auctions Hybrid Mechanisms
Pricing and Allocation Is the offer price set before or after information about the state of demand is acquired? Are shares allocated in a discriminatory or non- discriminatory manner (favoritism vs. pro rata)?
5 August 1992, Shenzhen: Before the rioting started, crowds waited for the new share subscription forms
Google’s IPO File price range of $108-135/share Auction result: $85/share offer price Closing first-day price of $100.33/share
1. (10 points) Bookbuilding has become increasingly popular around the world for selling IPOs, in spite of greater underpricing and higher gross spreads than for auctions. What are the advantages of bookbuilding relative to auctions for selling IPOs? Answer this from the perspective of an issuing firm. 2. (10 points) What are the disadvantages of bookbuilding relative to auctions? Answer this from an issuer’s perspective.
3. (10 points) Were there any unusual valuation issues with Google’s IPO? What is the impact of the dual class share structure?
4. (10 points) The case mentions that Google’s implied valuation of $29 billion was below Yahoo’s valuation of $38 billion at the time. What assumptions would be needed to justify a $29 billion valuation in a DCF analysis?
5. (10 points) Should Google have used an auction? Should other firms going public do so?
What went wrong? Out of equilibrium disclosure strategy First post-IPO earnings announcement on Oct. 21, 2004, with revenue up 105% from the year- earlier quarter: price jumped 15.4% Second post-IPO earnings announcement on Feb. 1, 2005, with revenue up 101% from the year-earlier quarter: price jumped 7.3%
IPO Underpricing Is it equilibrium compensation for risk-bearing or providing information? Is it excessive, with rent-seeking behavior common?
Scandals (SLAC): Spinning: Allocating hot IPOs to the personal brokerage accounts of top executives in return for company business Laddering: Requiring the purchase of additional shares in the aftermarket in return for IPOs Analyst conflicts of interest: Giving “buy” recommendations in return for underwriting and M&A business Commission business in return for IPOs: Underwriters allocated IPOs primarily to investors that generated soft dollar commissions on other trades
Academic Evidence on SLAC Problems : Spinning: Xiaoding Liu and Jay Ritter’s “The Economic Consequences of IPO Spinning” Laddering: Grace Hao’s 2007 JFE paper “Laddering in Initial Public Offerings” Analyst conflicts of interest: Mike Cliff and David Denis’s 2004 Journal of Finance paper and Liu-Ritter paper Commissions: Jon Reuter’s 2006 Journal of Finance paper